Thursday, December 23, 2010

Peace On Earth, Goodwill Towards Men

Year-end 2010 has brought us to a particularly spirited rendition of the portfolio dressing, tax-loss selling histrionics that always seem to characterize December. We are having one heck of a Santa Claus Rally. It also brings us to what seems to have become seasonally affected hostilities over the appropriate expression of the holiday that is December 25. The god haters and various others of the vinegar-hearted persuasion want to tamp down if not snuff out the customary pleasantries that most of the rest of us enjoy. On the other side is that strain of Christians who insist that we all dial down the festivities and keep the focus on “the reason for the season.” I would like to suggest that both sides should back off and let the rest of us enjoy a festival that is deeply rooted in that foundational edifice we call Western Civilization. To the former, I would ask, what part of peace on earth and Goodwill to men (an admittedly dated expression signifying all of humanity, both in the abstract and in the often much more difficult to stomach particularity of the individuals who cross our paths and otherwise disrupt our selfish agendas) do you have a problem with? And to those Christians who insist on being heirs to the very caricature of the Puritans, described by one wit as “distressed by the very thought that somebody, somewhere might be enjoying himself”, I would suggest that you have 365 days per year to honor your Lord, but the rest of us only get to celebrate Christmas once a year. The Christ you say you want to share with everyone else has a compelling proposition all by Himself (“a new heart”, “Life, in full”). It doesn’t need to peddled at every possible opportunity.

It is hardly surprising that a culturally mandated festivity found its way on to the calendar on or about December 25. We all know about solstice, although perhaps the less we know about how some of our ancestors marked that occasion, the better off we might be. Even with all our modern comforts, especially those light bulbs that are about to be mandated out of existence, short, dim days, long nights, and inhospitable weather grow wearisome as the weeks grind by. Imagine not having anything but fire to light things up, and only a few folks having much of anything to burn. Now consider the effect of latitude on this condition, how far north so much of European West that defines our cultural heritage is located. Sunny Venice is as far north as Burlington, Vermont. That wellspring of western thought that was Edinburgh? Follow its latitude line far enough and it clips Alaska. Our ancestors knew about cold, dark and hungry for weeks at a time. They might have been illiterate, bellicose, superstitious, and intolerant of anyone not from the same clan or tribe (but then again, perhaps the weren’t. So much of what we call history is largely guesswork), but they weren’t stupid. The idea of a little communal gathering to fortify themselves against nature’s siege was not exactly rocket science (or even tin smithing!). So as far as we can tell, there has not been a time when people in the parts of the world that, thus far, have mattered most, have not had a celebration of some sort on or about what has come to be denoted as December 25.

And not just them. Where, save but redoubts of the most pathetic personality cults and ideological fads (e.g., North Korea) has the custom of making at least a little merry with Christmas not spread? Despite dogged efforts by generations of missionaries, not even 1% of Japan identifies as Christian, and yet it is not hard to find evidences of the celebration of Christmas in any of its major cities (and not just by the purveyors of consumer electronics). And wasn’t that Dubai, in the heart of the United Arab Emirates, that just set the record for the glitziest Christmas tree ever? Share a Bible and go to jail, but something about Christmas is larger than any faith, and they all want in on it. Christmas is something that everyone can have a piece of, if only in the same measure as folks in, say, Albany NY, might embrace Cinco de Mayo as an excuse to duck out of work early and go pound down some margaritas. With so much at work in the cosmos to divide and alienate people groups, right down to the very fallenness of the human condition, Christmas seems to be one thing pulls in the opposite direction.

I find that with each passing year, the very music of Christmas becomes an ever stronger tether across time, an antidote to that malaise triggered by tempus fugit and the tyranny of the immediate Now. In a world that at least seems to be more and more defined by constant change, there is solace in things that evoke permanence. Christmas music connects us not only with celebrants from generations past, but also with celebrations when we were the young ones instead of the older ones. This is a good thing, worth doing. This year, the meaning of Christmas, or at least a meaning that I think all “men of goodwill” could embrace, came to me in the words of a familiar carol. In “Oh, Holy Night”, we hear the words:

Long lay the world, in sin and error pining
Til He appeared and the soul felt its worth.

Now the meaning of words will be deepest for those who have experienced what it is to know Christ, the One who put the “holy” in “holiday”, but one need not take that step of faith to want to celebrate the legacy received as a result of this turn of events. Because, indeed, the world did lay in sin (in the Greek of Scripture, hamarteo, or “missing the mark” like an arrow flying off course) and error (something anyone who practices the craft of investing becomes painfully familiar with). And indeed pining, if we are to believe the Greek philosophers and their Roman proteges. 2010 years ago civilization, which is to say humanity having organized itself enough to have designated note-takers, had been around for a very long time, at least twenty times as long as the 234 years that our experiment in ordered liberty has endured. There was peace, but it was of the iron-healed, nail you to a tree if you piss us off variety: Pax Romana. It has been credibly observed that it was as if the project that was humanity had exhausted itself and rolled over in despair. (See G.K. Chesterton.) And yet somehow, in a most unexpected (prophesied, but only recognized much later) way, something Transcendent entered into humanity, and things were never the same. That this singularly influential person entered what we call Hi(s)story is a fact of record, no longer in dispute. A hundred years later, the changes wrought by His brief life were scarcely recognizable outside of a few enclaves, but a couple of hundred years after that, it had toppled the Roman order. Why? Because somehow, for the first time ever, “the soul felt it’s worth”, and the power of the Presence that makes this happen kept growing and growing. It would be many more centuries before this notion would crystalize into the idea that we are “endowed by their Creator with certain inalienable rights” (by what power, what sovereignty, could they possibly be deemed inalienable?). This idea, coupled with a few innovations like printing and ability to tap motive power from something besides wind, water or muscle, is what jarred the trajectory of what we like to call progress (or at least used to, before “progressive” got highjacked into a term antithetical to liberty) in way that rushed us to our present lofty, unspeakably prosperous heights.

Compared with even the most splendid aspects of all the interminable centuries leading up to the event we celebrate as Christmas, a great and growing portion of the world is an unimaginably free and prosperous place. And as if that were not enough, there is the reminder of blessings can emanate out of the most inexplicable circumstances. For this pivot point in human destiny was not on some grand stage (complete with tele-prompter). It was peasants, quite possibly teenaged and illiterate, enduring one of life’s most difficult to endure moments, in a stable, in a backwater town. We are told, in accounts whose reliability has withstood the tests of time and criticism, that there were evidences of divine activity on that night, but subsequent events indicate that these were quickly forgotten. In any case, after that night, humanity had a new hope, and things would never be the same. And for this, all of us, regardless of creed or with no creed at all, should be thankful. Our hearts should swell in merriment if we consider just how much this event has blessed us. And so I say, “Merry Christmas!”

Friday, December 10, 2010

Ride the Tide

Texas this time of year swings between northerly blasts almost cold enough to freeze the pipes in the well house and flows off of the Gulf that have us right back in tee shirts and flip-flops, if only for an afternoon. Last week I jumped on a few days of benign weather and strong tides to enjoy the coastal flats. The Market’s anticipation of an intriguing political development (i.e., what appears to be compromise on taxes between the Administration and the Republicans, heralding paroxysms of dismay, disgust and debilitating skulduggery within the Democratic camp) was inflating my net worth in that exuberant sort of way that makes it kind of hard to buckle down and work (tax cuts as disincentive to work, oh my!) One result of this trip, besides a nice bag of sea trout filets, was a couple of reflections that I think have bearing on how we want to be invested as we enter the New Year.

The first of these would be a reminder that however grim the economy, as measured by the statistics we use to denote “normal”, there is still a tremendous amount of economic activity going on. There is a sense in which the patch of ground I covered, the drive through San Marcos, Seguin, Stockdale, Karnes City, Kenedy, Beeville, Skidmore, Ingleside and Aransas Pass is not particularly blessed, bleak. The soil is meager at best, though there are a few spots where wells or tanks indicate hydrocarbon deposits. The heat is oppressive for most of the year, drought is not infrequent and hurricane season is a “might have to get up and leave for a while” reality. Flora leans to species like pin oak and mesquite, fauna to things that bite or sting (or both!). Many of the towns seem to have outlived whatever motivated their settlement, though all but the dinkiest of them have a Dairy Queen siphoning a nonstop flow of $$$ into the pockets of the Sage of Omaha (the contribution margin on a $2.39 dipped cone? No wonder he bought it.) But when compared to the torpor of most of the vast sweep of human experience across time and rest of the globe, this patch of ground that so many just fly over and marvel at its emptiness, if they consider it at all, was throbbing with economic activity.

On the drive down, countless herds of cattle give way to vast flats that whose ideal crop appears to be sorghum. The oil wells and ancillary activities that support them seem a little more so ever time I make the trip, as do the wind farms. Along the coast, petrochemical plants like where Dupont makes what must be a very large share of the world’s refrigerant are lined with miles of railcars. Out on the water, I can see a steady stream of ships moving up and down the coast, and a more erratic procession of shrimp boats coming and going in their eponymous channel. The yards where offshore drilling equipment gets built stretch off towards Corpus as far as the eye can see. Towns like Aransas Pass, which in summer months are overrun with vacationers but then quickly empty out, are starting to fill up again with winter Texans, refugees seeking escape from the scraping of ice, the shoveling of snow and at least some of the ache and pains of advancing years. And all this co-exist with an amazingly resilient ecosystem. Whatever ecological damage was done here by the petrochemical industry is a thing of the distant past, now sanded, silted or barnacled over. Early one morning I was treated to velvety sound of geese winging just over head as I was unloading my kayak, the roar of 10,000+ ducks taking off at once as I was dragging said kayak across too-skinny-to-paddle flats a few hours later, and the startling blast of a porpoise’s blow hole, just a few feet astern, as I was making my way up the channel a few hours after that. The human sounds that day consisted of the highway until I was 1000 or so yards away, a passing power boat now and then, a steady stream of USN training aircraft making their way back to NAS Corpus Christi, and some occasional thundering clangs from miles-away ship (or rig) yards.

What I take away from all this is that however much that construct we call the economy is underperforming its estimated potential, however much collateral damage from the near death experience of Q4 08 still needs to be repaired, we are still a rich and vibrant economy. The heartland has not rolled over and died. Work is being done, resources are being extracted and rendered more valuable, and oh by the way, the ecosystem is getting healthier all the time. To open one’s senses up to all this, and then wonder how many other similarly empty-seeming slivers of our vast country are similarly blessed, is to make short work of disregarding the doomsayers who write and talk as if they never get out of the office or the studio.

The other takeaway from this intra-coastal adventure had to do with tides, ebbs and flows that are inexorable, somewhat predictable and can really effect the risks and rewards of one’s endeavors. The tides in this area are nowhere as strong as what I recollect from the littoral adventures of my youth some twenty degrees further north and now going on a half century ago. A swing of 30” low to high on this trip was unusually strong, on the last trip it was on the weak side at about 4”. Even when it is running strong, one has to look beneath the surface to notice it (unless one has neglected to anchor their boat before getting out, then it gets real obvious in a hurry. This happened to me a couple of years ago, with nearly fatal consequences.) A moment at a time, the tide barely makes its presence known, and yet it can be hugely important. It is usually what stirs up the food chain in ways that register as fish “biting”. Disregarded, it can be a real day-changer for power boat operators, especially at the speeds they seem to want to go. (Kayakers, too, as in the difference between paddling in 4” and dragging in 3” of water, especially if the bottom is muddy.)

Tuning into the the tide reminds one that ebbs and flows are very much a part of the created cosmos, and this extends into matters human as well. Markets ebb and flow. There seems to be a norm for the time we have data for (the last century or so) that the stock (liquid, proportionate representations of ownership) rise in value along with their underlying, aggregate value. Every 3-4 years or so (the variability being wrought by shocks like war) this upward trend is interrupted for (usually) a major fraction of a year in a corrective phase we call a Bear Market. Once a generation or so, a larger rhythm makes its presence felt. As if to reflect the departure or diminished influence of those who learned the harsh lessons of the last time around, this cleansing flood overruns it normal banks and chastens us all (see 1929-38, 1973-82, 2000-2009).

I suspect this is well understood by many investors, at least those who have studied the craft seriously and practiced it for more than a few turns of the four-or-so year cycle. But pondering tides (a subset of the challenge of cracking the code on the elusive redfish) got me thinking about another phenomenon that has vexed investors in recent years: the pathetic underperformance, relative not just to other asset classes but to the commercial performance of the enterprises they represent, of so many large cap stocks. This has been well remarked on now for going on a half a decade. As I was experiencing how lunar pull causes huge quantities of water to slosh around the Gulf of Mexico and intricately varied basins and channels that make up the coastal bend of Texas, it got me thinking about other kinds of flows. How when an awful lot of something flows in a closed system for a very long time and then starts to flow the other way, it will probably run for a very long time. So it was with stocks like INTC or MSFT. How many years did they spend getting over-owned by what old time chart or tape followers called “weak hands” (e.g., no-brainer portfolio fill, generic index funds held simply to “own domestic equities”)? These are but two stocks that represent companies that have performed more than credibly over the past decade, have unsurpassed financial flexibility and solid, at least moderate, growth prospects, and yet as stocks they have become “dogs” (no offense to our canine friends).

What I think has been missing from the discussion of this enigma (a discussion usually couched in terms of the brighter prospects of other enterprises who all but certainly are in need of investment bank services) is a very basic principle of stock price appreciation: Stocks don’t go up simply as a function of how ardently investors want to buy them. It also matters how readily owners will come forward and meet that demand. Reasons to sell are much more extensive and quite often much less well considered (e.g., inherited, change of account manager, simple impatience). Every stock that trades is a use of funds for some and a source of funds for others. The trouble with stocks like INTC or MSFT is that the result of spending nearly two decades to achieve “must own” status among a vast array of investors made them widely owned sources of funds for a considerable period thereafter. This disappointment was not obvious right away. They traded down in quite reasonable fashion when the Tech Bubble burst. It was once the recovery commenced, and not-particularly astute investors who had been conditioned to think of them as “sure things” started underperforming in them that the “source of funds” designation became the proverbial immovable object. It may have been specific to the stock itself (“Sell the INTC”) or a function of the dumping of generic index funds to buy something a little more au courant, but in any case it aggregated into a seemingly bottomless well of supply to meet whatever demand there has been for these stocks.

The good news here is that no tide runs forever. This one, this undoing of the biggest “must owns” circa December 1999, is probably about down to its lees. I strongly suspect that Intel’s protracted hiatus in share repurchase activity, just recently ended, was less about economic uncertainty (at least after the first few months) than it was about facing up to this reality. I am also strongly suspecting that as long as the economy doesn’t get blindsided, many of these gone-nowhere-forever big caps are going to surprise. With the “weak hands” mostly gone, the supply will no longer soak up demand so easily. This will register as indications of price momentum, which will trigger the usual self-perpetuating consequences. The no way to predict exactly when this tide turns (actually it does so one stock at a time) or how long or how high it will go. But just as a huge flood (1982-99) set the stage for this excruciatingly protracted ebb tide that has run for going on eleven years, its consequences will surprise all of us, frustrate those who ignore it and exasperate, if not destroy, those who are foolish enough to fight it. Fish On!