Keep it simple stupid.

As a new investor, sometimes I like to take a step back and ask rather simple questions. "Keep it simple stupid" is an overused mantra in my office, as our 3 person shop plugs away on structured credit hedge fund analysis and call ourselves experts in the same products that our parents got screwed by. Today, Wall Street execs still hum the familiar quote from Jerry Maguire as they scramble to predict market movements and price securities for their clients, a very complicated feat. But why is it complicated? How can the brightest minds in the wealthiest country in the world stand by and watch the stock market awkwardly fluctuate like a elementary school student learning to play the trumpet? I like to keep it simple.

Europe.

I start with Europe because I like Europe. I studied in Ireland for 3 months, while traveling to several other surrounding countries, absorbing and consuming the rich cultures while discovering new and interesting people. I never visited Greece. How can such a beautiful country that brought us the yo-yo become such a massive target for market shorts? As April was coming to a close and the market teetered at nearly 80% higher than its low less than one year before, bulls decided to let Greece win. The beautifully engineered credit default swaps on Greece debt surged as bond holders rushed to insure what would seem like rising exposure to default. Heck, investors that didn't even own Greece bonds wanted in on the action, pushing the cost of insurance higher and higher. As the EU contemplated what needed to be done, it became more apparent that Greece was too interconnected to the rest of Europe and just as importantly to the value of the 10-yr old Euro to let the country go bankrupt. So just as all governments react to threats, they began to throw money around. Sitting in that conference room must have been a joke... "a billion dollars here, a billion dollars there, lets just go ahead and make it an even trillion, that will be sure to spur markets up." And it did, for maybe one or two market sessions. The point I would like to make about Europe has nothing to do with Greece. The governments in Europe reacted in a way that suggests Greece is only illiquid, not insolvent. This is the problem. The difference between liquidity and solvency is time. When a business is illiquid, it may need a quick pump-up of cash to get things going. In contrast, insolvency is when a business's balance sheet can be accurately compared to toilet paper, not the Charmin Ultra Soft kind either. An infusion of cash may allow an insolvent business to continue to run temporarily, but eventually it's going down the toilet. Europe does not need to show us that it is capable of levering up its countries, but instead that it can get back on track to productivity and growth. Until performance and growth numbers can be shown to represent such change, markets will continue to act unkindly. And we have finally reached my simple epiphany: economic growth.

United States.

We now move across the Atlantic to the land that holds the wealthiest stock market in the world, the USA. However, the focus remains on growth. Bill Gross, the founder of PIMCO, a bond fund, writes an investment outlook every month (its fantastic, every investor should read it). He came out with a catchy term months ago in one of his reports called "the new normal." What he wanted to express was the idea that growth would simply slow down. That we are not a slinky that will shoot right back up from this recession but instead fall short due to the gravity of changes in global economies. He suggested that GDP growth would not be the usual 3+%, but instead waver around 1-2%. If Wall Street had a spine, it would have shivered at this thought. As a bond investor, he may have biases against equities, but you still need to absorb such a powerful statement and think about the implications. If growth projections change even 1% on valuation models across Wall Street, just think of the wave of sell orders drowning brokers on such massive price repercussions. Months later in March, I was draining my morning cup of coffee while scanning business news, and I found an interesting article that made a lot of sense. The headline was something like.. "Look at Sales." Wall Street was looking at sales too, but it was mainly to calculate earnings by netting costs. What I realized that morning was that although markets were reacting strongly to great earnings numbers, they weren't much interested in the growth of sales. As earnings are a great indicator of business efficiency, it is sometimes a poor representation of revenue growth and demand, both of which were lacked over our "recovery period." Businesses were restructured during the last year to deflect poor demand, and squeeze out useless costs, creating a leaner and often times more profitable business. However, this doesn't show the US economy is improving, it shows companies are learning how to better adapt to a weak aggregate demand environment. We need demand, which brings sales and growth to our economy. Only until sales increase can costs increase, lowering unemployment and sparking a new cycle of demand.

Where are we?

Referring to the state of the economy, my senior seminar finance professor used to ask at the beginning of each lecture, "Where are we?" It's already difficult to predict what's ahead, but how can it be this hard to just know where we stand? There is a lot of noise in the world today that makes this question very difficult to assess. As an investor right now, I believe you need to filter out all the junk that has been dragging the market wildly in all directions, and focus on the bigger picture. The stock market is simply a collection of contracts that represent the value of businesses. These businesses need to grow in order for the value of the stock market to go up. How and when will businesses grow? How much will they grow and how fast? These are the issues at hand and this is where I am focusing my energy moving forward.