Mr. Market is the fictional business partner Benjamin Graham invented in his classic value investing book, The Intelligent Investor. As Mr. Graham describes him, Mr. Market is the business partner of the investor, offering on a daily basis to buy your share in the business or alternatively to sell you his share. There are times when he is wildly optimistic and offers to buy your shares for a price that is irresistible. Other times he is so depressed he offers to sell you his shares for a price that is so low that it can’t possibly be passed up. He is a manic depressive, this Mr. Market and the intelligent investor, according to Mr. Graham, can make a lot of money taking advantage of his mood swings.

Benjamin Graham was mostly writing about stocks but markets are markets and a form of Mr. Market exists in every tradable asset from bonds to oil to gold to stocks. And he is just as manic depressive when it comes to other markets as he is in stocks. Second to second, minute to minute, Mr. Market offers everyone the opportunity to buy or sell at a price set by his emotional barometer. In doing so, Mr. Market provides invaluable information to the investor who can control his emotions if not his intelligence. It is emotional IQ more than actual IQ that determines success in markets. In fact, there are times when I wonder if a high IQ might actually be detrimental to investment success but that discussion is an ongoing one, passive versus active, that has yet to be decided although the passive, dumb approach is certainly enjoying a healthy lead at the moment.

So, as a new year dawns, maybe it’s a good time to sit down and take the measure of Mr. Market’s mood. One immediate observation is that Mr. Market, if he be one person, appears at present to be experiencing a bit of multiple personality disorder. The Mr. Market who trades large US stocks and Treasury bonds is in a pretty good mood while the Mr. Market who trades foreign stocks and commodities is in a bit of a funk. Even within the US, Mr. Market seems to be telling us different stories depending on whether he is trading stocks or bonds. His stock side is optimistic about future US growth while his bond side is exhibiting the early warning signs of depression.

To expand on that a bit, the US stock market is marked by valuations that are – at a minimum – on the high side of normal and sentiment that at times has approached gaga. Over the last year the buy the dip mentality of US stock investors has gone to an extreme rarely seen with a 10% correction – or more – conspicuous only by its extended absence. The week before Christmas, according to Lipper, investors poured $36.5 billion into equity funds, the biggest weekly inflow on record as investors large and small chased the bull market to all time highs. And actually it was more than that; the $36.5 billion includes a $2.5 billion outflow from foreign stock funds. There is nothing that sets investors’ hearts a flutter like US stocks right now. Mr. Stock Market really wants your US shares and he’ll pay a dear price for them.

As for bonds, well they aren’t exactly hated – bond funds sucked in $6.1 billion that same week – but investors are still wary of taking on duration risk, bunching their purchases in the short end of the curve as seemingly everyone expects higher interest rates. Interesting then that the best performing part of the bond market over the last year was in the very long duration bonds that Mr. Market was and still is shunning. The yield curve spent all of last year flattening, especially at the long end of the curve with the 30 year bond outperforming the 10 year by a pretty wide margin.

Even within the Treasury market there is a bit of cognitive dissonance. The nominal bond market has rallied much more than the TIPS market of late indicating a pretty severe drop in inflation expectations and actually a bit of a rise in real growth expectations. That appears to be an attempt to express the belief that lower oil prices will push down inflation but raise real growth. That has certainly been true in the past when oil busts have been a confined to a few states – the early 80s and late 90s – but it will be interesting to see how that dynamic plays out over the coming year. The fracking boom was more widespread than previous energy booms and the fallout of lower prices will have a larger effect this time. The benefits are front loaded as consumers have more cash to spread around to non energy industries but the detrimental effects will take longer to play out.

Which brings us to commodity markets, the most volatile and schizophrenic of all. The US dollar has a lot to do with that and if there is anything Mr. Market likes more than US stocks right now it is the greenback. His optimism about the outlook for the US – or is it his extreme pessimism about the outlook for the rest of the world? – has pushed the dollar to multiyear highs and commodities to multi-year lows. Oil is the commodity that everyone is focused on but it is only the last of the commodity dominoes to fall; the CRB index is at a low last seen at the depths of the 2008 crisis. What is interesting is that Mr. Market seems to want to try and catch that falling knife in the energy sector. The crude oil futures market still shows large speculators net long by a wide margin and within those mutual fund flows one of the most popular categories was the energy sector. Despite taking a beating Mr. Market appears to be lining up for a few more lashes.

Lastly, foreign stocks are about as out of favor as they’ve ever been right now with the EAFE having underperformed the S&P 500 since 2008. Emerging markets have also underperformed but only since about 2010. It isn’t coincidence that this has happened during a period of dollar strength and it will likely take a reversal of the dollar to reverse the stock performance.

It often seems as if Mr. Market is speaking in tongues but there does seem to be a clear message here believe it or not. Mr. Market really wants your US stocks and it would seem prudent to take a look at your portfolio to see if there are things in there you really don’t love anymore. If you wouldn’t buy it at today’s price maybe you ought to consider offering some to Mr. Market. On the other hand, Mr. Market isn’t much interested in long term bonds – just as he wasn’t last year – and particularly TIPS. Maybe you ought to consider taking some off his hands. If you feel a need to maintain equity exposure, you might also consider taking a look at foreign stock markets which offer stocks at valuations quite a bit lower than the US. It might still be early yet for a full commitment to foreign markets since the dollar shows no signs of topping but swapping expensive shares for cheaper ones is generally a good idea. As for commodities, it seems Mr. Market is still a bit too eager to buy, searching for a bottom that hasn’t come yet. One exception might be gold which has outperformed the general commodity indexes recently.

Benjamin Graham is known as the Father of Value Investing but he was, more than anything, a contrarian. Taking advantage of the mood swings of Mr. Market is not an easy thing as it requires bucking the consensus. But investing isn’t supposed to be easy and doing it right means being uncomfortable a lot of the time. When it works, when Mr. Market comes begging to buy the thing you bought when he didn’t want it, there is no better feeling in the world. But you’ll never feel that way unless you are willing to get out of your comfort zone and do the hard trade. Mr. Market, the consensus, is comforting but only for a while and only until the crowd turns into a mob. Then it’s every man for himself and devil take the hindmost. Better to be early and avoid the rush.

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For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@4kb.d43.myftpupload.com or   786-249-3773. You can also book an appointment using our contact form.