Appeals Court Rules (7vs4) Against Trump, but Life Goes On - Weekly Blog # 904

 

 

 

Mike Lipper’s Monday Morning Musings

 

Appeals Court Rules (7vs4)

Against Trump, but Life Goes On

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

All of us were unprepared

The “Founding Fathers” designed our government to protect the minority against the majority, with the courts ruling on critical decisions. Now that the future of tariffs rests with the courts, I suspect The President will push for a quick decision.

 

I would hope at the end of judgement day we will have answers to two of the motivating drivers behind The President using tariffs to force discussions with both Congress and foreign countries.

• The first is “Non-Tariff Trade Barriers”, which may be larger than the size of the reciprocal tariffs, which are policies the importing nation forces on the exporting nation. The prohibition of certain fertilizers on imported food elements, or various power constraints on mechanical equipment or transportation vehicles are examples. There are a multitude of restrictions like these imposed by national or local governments on people’s taste buds. In total, these restrictions may very well be enormous in aggregate.
• The second issue is the use of the money generated by the tariffs. (It is well worth remembering that for more than a hundred years, tariffs were the main source of funding for the US government.) Economically, tariffs are a tax on the society. However, it is not clear whether the funds raised will fall under the control of the Internal Revenue Service (IRS) or some other instrument of government. The funds raised may potentially be used to reduce the existing deficit, pay for the newly issued tax breaks, or paid out directly to consumers.

The answers to these questions are needed to solve the riddle of weather these tariffs add to or reduce inflation. The independence of the Federal Reserve Bank is therefore a critical factor in dealing with the tariff issues. Many feel the Fed controls short-term interest rates and influences intermediate-term rates. However, it is not that simple. In an article by George Calhoun in Forbes, he lists recent experiences where the Fed lowered rates while the markets raised them. One of the reasons rates rose is the dollar declined or was expected to fall. George Calhoun is a professor and fellow board member at the Stevens Institute of Technology.

 

The commodity markets are keenly conscious of inflation expectations. This week commodity futures rose, led by natural gas +2.64%, gold +1.21%, and copper +1.01%. Another way to play the same trend is in the stocks of the commodity producers, which are owned by specialty funds. Specialty precious metals funds rose +2.70%, China funds +1.31%, Agricultural funds +1.30%, and Base Metals funds +1.12%. While the Courts will decide on the appropriate questions, the markets will collectively reward those who guess right regarding the direction of prices.

 

Please provide any thoughts that might give me a clue on how to avoid losing money and perhaps make some.   

 

 

 

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Mike Lipper's Blog: What We Should Have Been Watching? - Weekly Blog # 903

Mike Lipper's Blog: The Week That Wasn't - Weekly Blog # 902

Mike Lipper's Blog: DIFFERENT IMPLICATIONS: DATA VS. TEXT - Weekly Blog # 901

 

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What We Should Have Been Watching? - Weekly Blog # 903

 

 

 

Mike Lipper’s Monday Morning Musings

 

What We Should Have Been Watching?

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

Lessons from the racetrack and life

At any given time, humans tend to congregate around what is most important to them or what is going to happen. These topics are labeled favorites, both at the track and by psychologists. On any given day at the track favorites win a minority of the races. More importantly, when favorites win the payoffs are relatively small, as the winnings must be shared with a large number who have reached the same conclusion.  Thus, backing the favorite is a low return game.

 

The problem in going with the less popular is their winning ratio is lower, as most people bet on the favorites. Thus, in terms of frequency, favorite betting wins.

 

There is a more rewarding goal, winning more money over time with less frequency but higher returns. This is the choice I learned at the track and apply to investing in securities.

 

This Week as an Example

Using the public media and limited public conversation, their favorite investment topic was the speech by Fed Chair Jerome Powell at Woods Hole, the implication of which was a cut in short-term interest rates. While most investors believe these are probably the most important questions to be asked, I believe there are more important questions with higher, longer-term implications. These can be grouped under labels of concentration and valuation.

 

Concentration

Much has been written about the amount of money invested in seven or ten largely technology/financial stocks. One study shows that the ten most popular stocks in the S&P 500 represent 38% of the total value of the entire index. On average, the ten largest market caps in the index between 1880 and 2010 represented only 24%. However, I question the math or source because railroads represented 63% of the stock market in 1881.

 

This observation is of particular interest to me as a graduate of Columbia College. Around 1880 Columbia had an endowment account restricted to investment in the most secure stocks. You guessed it, lawyers restricted the investments to railroads!! This particular endowment was to be spent on bricks for the campus. Thus, for many years all of Columbia’s buildings were brick faced.

 

There were many important implications that should have been drawn from this case, especially since every single railroad went into bankruptcy years later. However, if you had included political analysis along with legal analysis it was obvious railroads had become too powerful in the country.

 

In terms of political analysis and understanding how the US works politically, people should read a new 856-page book written by Bruce Ellig, a good friend of ours. The title of the book is “What You Should Know about the 47 US Presidents”. The book devotes a chapter to each President, covering the most important laws and regulations of his term. Included in the book is information about the President’s life and personal activities.

 

Valuations

John Auters of Bloomberg believes “valuations are extreme”. Prices in terms of sales, earnings, book value, and dividends are at a stretching point. In a recent survey of intuitional managers, 91% believe the US market is overvalued and 49% believe emerging markets are undervalued. Some 60 years ago I worked for a research-director who believed shipments of boxes were a good economic indicator. They probably still are, and that is why I took notice that they were down -5% in the second quarter.

 

With the federal government pushing to let retail investors participate in private capital transactions, particularly private equity, the health of the market for these longer-term, illiquid investments, could impact the listed market. There are approximately 3100 positions in private capital firms that are unsold. Their retail owners may not see the level of distributions they were expecting, which could unfortunately increase the volume of listed securities to be sold.

 

Long-Term Horizons:

 In the long run equity investing can generate very attractive returns. A dollar invested in the 1870 equity market by the 25th of July would be worth $32,240 in nominal dollars before taxes this year.

 

 As often said, history does not repeat but often rhymes. There are a number of parallels with the market crash of August 1929 to November 1936, and the economic depression that followed from February 1937 to February 1945, which will be discussed in upcoming blogs.

 

 

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Mike Lipper's Blog: The Week That Wasn't - Weekly Blog # 902

Mike Lipper's Blog: DIFFERENT IMPLICATIONS: DATA VS. TEXT - Weekly Blog # 901

Mike Lipper's Blog: Rising Risk Focus - Weekly Blog # 900

 

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The Week That Wasn't - Weekly Blog # 902

Mike Lipper’s Monday Morning Musings

 

"The Week That Wasn't"

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

History or Not

TWTWTW (Was the abbreviation for "That Was The Week That Was". The British had a somewhat comical review of critical news, with jibes at our doings or non-doings. In a number of ways this past week was one of increased anticipation of the steps toward smoothing out some of our problems. The most critical was a cease fire in Ukraine, which would be a step toward ending the killing in that war torn country, and would also influence global economic trends. These results were expected to lead to more sales in the US and abroad, allowing the Fed to lower interest rates.

 

At the so-called summit in Alaska the two antagonists spent three hours restating existing positions but found only some unannounced agreement on how to reach a ceasefire.

 

At the same time a collection of US central bankers met to discuss economic policy, which to most of the public was encapsulated to mean changing the short-term Federal Funds rate. The official topics to be discussed were demographics, productivity, and immigration’s impact on changing the US job market.

 

Some available data points indicate that early in the next century the US population will peak. Long-term labor productivity is largely driven by education, beginning at the earliest school and home days through the graduate levels. Education is lacking appropriate leadership and funding. In the past, immigration brought us hard-working, intelligent people, a trend that could now be reversing.

 

What is the Data saying?

The following are some data points I am reading, in no particular order:

1. This being an investment blog it is important to note that the bottom of the US stock market occurred in 1929, before depression analysis officially began. This suggests the stock market may be an early warning signal.
2. The "Taylor Rule" predicts the Fed funds rate. It states the current Fed funds rate of 4.5% should be 5%.
3. Deere reduced its revenue estimate. Farm income was in a recession before the depression, and it was one reason for passage of the Smoot-Hawley Tariff. (I believe one reason the current Fed has been reluctant to lower interest rates are the many smaller midwestern and western bank loans and the feelings of their senators. Jamie Dimon is also concerned that it is difficult to quickly take over community banks under present rules.)
4. Jerome Powell is looking at the impact of tariffs on business services excluding shelter, which appears to be rising faster than other measures of inflation. In the month of July business services rose 1.4%.
5. Over the last 3 weeks the AAII sample survey’s bearish projections have risen to 46.2% from 33.0%.
6. Each Saturday The WSJ measures the prices of 72 items. In studying the data, I have noted that the single largest gainer or decliner often results from an unusual market factor. Consequently, I look at the second biggest gainer or loser and look at the spread between the two. In the latest week S&P 500 Health Care rose +4.62% while Comex Gold sank -3.00%, a spread of 7.62% which looks normal.
7. In the week ended Thursday, the best performing mutual fund peer groups were those unpopular for most of this year. (This suggests for the moment that there is safety in unpopularity. If you are looking for the best odds, bet on a material change. All three of the small company categories: growth, core, and value show promise.

 

Working Conclusion

Beneath the surface there is a lot happening, both in the long-term (the next century) and from a trading viewpoint. One should pay attention to quiet markets.

 

 

 

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Mike Lipper's Blog: DIFFERENT IMPLICATIONS: DATA VS. TEXT - Weekly Blog # 901

Mike Lipper's Blog: Rising Risk Focus - Weekly Blog # 900

Mike Lipper's Blog: Melt Up Not Convincing - Weekly Blog # 899

 

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DIFFERENT IMPLICATIONS: DATA VS. TEXT - Weekly Blog # 901

 

 

 

Mike Lipper’s Monday Morning Musings

 

DIFFERENT IMPLICATIONS:

DATA VS. TEXT

 

 Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

School Solutions

As taught academically, the critical pivots in teaching both economics and security analysis are the numerical changes of a data series. However, as a long-term investor I am much more interested in the mood changes hinted at in textual renditions. While data precisely represents the past, text allows the reader/student to think about one or more different futures. This is why I believe philosophy or similar courses should include both economics and security analysis in their teachings.

 

Below is a brief listing of several data points describing last week (Implications italicized and discussed in parenthesis).

• Year-to-date Stock Transaction Volume: NYSE 7.11% vs NASDAQ 37.30%

(Five times greater in the younger, more speculative market, even if some of the NASDAQ is inventory swapping among dealers. Speculation normally leads to extreme up and down prices)

• Inflation Signals: The ECRI Index tracks industrial prices weekly and it normally moves gradually. Last week it rose +1.70%.

(I believe this was in response to the tariff news at the end of the week. Some market participants believe there will be industrial price increases soon).

• Participants in the AAII sample survey are increasingly worried about a down market in stocks, but others are not.

(Comparing the bullish and bearish projections of last week with those 3 weeks earlier. Bearish projections rose to 43.7% from 34.8% 3 weeks earlier. Bullish bets only rose to 34.9% from 33.6% for the same period, suggesting bears see reasons to be worried while bulls do not. Only one will be right over the next six months.)

• Equity mutual fund peer group averages +10%. Only one US Diversified Fund (USDE) peer group average has generated returns exceeding 10% year-to-date, multi-cap growth funds. Forty other peer groups have generated returns exceeding +10%, although they were less diversified.

(USDE Funds hold more assets than the other peer groups, which suggests being a holder of US equities was not a winning hand for most.)

• Investors need to be careful that the earnings reported are not accounting constructions. The London Stock Exchange Group (LSEG) and I.B.E.S. estimate that the S&P 500 Index will report a +8.3% gain for the 3rd quarter. However, they further estimate that corporate net income will rise only +6.3% for the quarter. Thus, 24% of reported earnings will be attributable to buybacks and other accounting techniques.

(Investors need to understand what they are paying 20x-earnings or more for. Hopefully, operating earnings can be repeated while earnings created through accounting cannot.)

 

Conclusions:

There are lots of reasons to be cautious. Some reserves should be considered a hedge for future down markets. However, this hedge should be viewed as a temporary buying reserve until prices more appropriately reflect the long-term value of accepting normal risk.

To aid future generations of investors as well those today, security analysis and economics need to be taught with a fuller understanding that it rests on the strength of ever-changing language.   

 

 

 

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Mike Lipper's Blog: Rising Risk Focus - Weekly Blog # 900

Mike Lipper's Blog: Melt Up Not Convincing - Weekly Blog # 899

Mike Lipper's Blog: It May Be Early - Weekly Blog # 898

 

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Rising Risk Focus - Weekly Blog # 900

 

 

 

Mike Lipper’s Monday Morning Musings

 

Rising Risk Focus

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

                 

Friday’s Four-Letter Word

In polite society we are encouraged to limit the use of four-letter words. This could be the reason we try to not use them in the financial world, which is a disservice to our performance analysis and investment achievements. Thus, I am dedicating our 900th blog to articulating the key to our investment survival, risk.

 

Risk is the penalty for being wrong, although it is also critical to winning. Without risk there would probably be no rewards for winning. As Lenin said, “There are decades where nothing happens; and there are weeks where decades happen.” It is possible last Friday was one of those weeks. After an extended period of “melt-up” from mid-April, stock indices, driven by a minority of their stocks, fell by large single digits or more. The media attributes the decline to employment.

 

Employment

Employment encompasses both large and small numbers of people, including us. The impact of employment is much broader than the number of people being paid to work, it influences both production and sales. (In the modern world published data does not include people who work without pay. Furthermore, there is no published data on the quality of the work done, nor the quality of those who wish to be hired. For current employers with open job positions, it is the absence of the last unknown factors which raises serious questions concerning the likelihood those open slots will soon be filled.)

 

One problem with the employment data is that only about 60% of the organizations report their numbers to the government on time, catching up in subsequent months. Thus, adjustments are normal. The current period includes the fiscal year ends for state and local governments, end of teaching year, and the federal government shrinking its totals. Regular users of this data probably understand these issues and adjust their thinking accordingly.

 

Bond Prices

Many businesses, governments, non-profits, and individuals generate insufficient revenue to pay for their purchases each and every day. To the extent they lack sufficient reserves of idle cash, they often borrow. Depending on their size and credit worthiness they will use the bond or credit markets. Unlike equity which has an indefinite life, bonds or credits have identified maturities. Consequently, the providers of cash are very focused on the short-term outlook of the borrowers. Each week Barron’s publishes a couple of useful bond price indices, consisting of ten selected high-grade and medium-grade bonds each.

 

Barron’s found another use for this data when they discovered that medium-grade bond prices rose more than high grade bond prices within a year of the stock’s price rise. Stocks decline when bond investors favor high-grade bonds. On Friday, high-grade prices didn’t move while medium-grade bond prices fell (yields went up). This is a negative prediction on the future of the stock market.

 

The negative view is understandable, many of these credits belong to industrial companies. Another source of information is the ECRI, which publishes an industrial price index which tends to move slowly. However, by Friday that index had risen 3.6%, which will increase inflation. (I assume it was the result of the announced level of tariffs.)

 

Questions

Has the Administration in their planning adjusted their expenses for the enforcement of tariffs? I wonder if we will see increased smuggling across our borders if the tariffs stay on for long? Are we increasing the Coast Guards’ budget?  How much will Scotch sales decline and Bourbon sales rise?

 

Please share your views.

 

 

 

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Mike Lipper's Blog: Melt Up Not Convincing - Weekly Blog # 899

Mike Lipper's Blog: It May Be Early - Weekly Blog # 898

Mike Lipper's Blog: Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

 

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Melt Up Not Convincing - Weekly Blog # 899

 

Mike Lipper’s Monday Morning Musings

 

Melt Up Not Convincing

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

Contrary Evidence Also Not Convincing

 

Low Transaction Volume, High Chatter

 

Short-Term Implications

 

1. NASDAQ is breaking up. Up volume is leading, while more prices are down than up?
2. Industrial commodity prices rose during the week, 115.8 vs 114.98 the prior week according to ECRI.
3. AAII weekly bullish outlook is declining, 36.8%, 39.3%, and 41.4% over the last 3 weeks.
4. WSJ weekly down prices seem strange. The worst was Natural Gas -12.71%, but the next worst was a -2.82% negative return. This suggests there were few negative prices. Natural Gas prices remained volatile, being up +7.57% the prior week.

 

Possible Longer-Term Implications

1. Trump used construction costs for an already constructed Federal Reserve building to raise the costs of the new headquarters. Chairman Powell spotted it. Assume for the moment this was a honest mistake, it suggests that the President’s staff is lacking something. There have been similar mistakes, some of which were part of the reason the courts ruled against various executive orders.
2. Charley Ellis’ column on David Swensen in the Financial Times listed some of the reasons for Yale’s outstanding long-term record. A long-term focus meant less liquidity was needed and analysis went beyond financial statements to management policies, and well-placed alumni which wasn’t mentioned. I tried to follow his approach.
3. Most US Presidents have focused on managing the government and society as it was when they came into office. President Trump is the fourth president to make fundamental changes. (The others were Jackson, Teddy Roosevelt, and FDR.) Along with the other activists Presidents, the current occupant of The White House wishes to proscribe new ways of thinking to change our behavior. This is what our founders feared, the tyranny of the majority over the minority. Our Constitution and Bill of Rights have built in checks and balances. Consequently, I believe we are going to see more court actions for the rest of this term.

 

Implications?

I believe it’s going to be increasingly difficult to develop a long-term investment policy as we go through a period of attempted structural change.

 

What do you think?

 

 

 

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Mike Lipper's Blog: It May Be Early - Weekly Blog # 898

Mike Lipper's Blog: Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

 

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It May Be Early - Weekly Blog # 898

 

 

 

Mike Lipper’s Monday Morning Musings

 

It May Be Early

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

A Usual Trap

A classic mistake in making future plans is focusing mainly on the present. In search of an investment policy for the next few years or longer, one should look at the causes of the main trends, not the size of the tariffs that have been announced.

 

The key force behind the announcements on tariffs is Donald Trump. His background is one of complex negotiations evolved from materially different views of how he sees the present and the future. I believe The President saw a critical problem of unfair trading terms facing the U.S. and saw a way to change the terms in favor of the country. He saw a way to solve the problem through meaningful discussion with the powers on the other side. The key was getting the right people around the table.

 

The core elements of unfairness are to be found in non-tariff trade barriers (NTB) erected by commercial interests with official or unofficial government support. (A number of examples were listed in last week’s blog, copy available.) While there is no published total of each country’s NTB effects, some experts believe their impact is twice the level of tariffs applied.

 

Mr. Trump’s way of dealing with foreign countries is to make the host nation an ally by using the size of US tariffs as a hammer. This is the reason behind the high announced tariffs, which is where President Trump expects the real bargaining to begin. I expect negotiations with major trading partners to take most of the summer. We may never fully understand the various changes to NTB’s, but a good clue will be changes to US tariffs.

 

Clearly there is another element to the aggregate size of the final US tariffs, the amount of cash expected to be paid to the US Treasury. This needs to be meaningful enough to keep the growth of the annual deficit acceptable to an unknown number of Republican Senators.

 

Most of these should be settled in the fall and early winter, so they do not unduly impact the mid-term elections. The economic background to the elections may be influenced by layoffs and the administration’s attempt to expand the economy. Additionally, further international actions may be the cause of how some state elections turn out.

 

The current crosswinds shown below may also impact the level of markets during this period:

1. After a period of outflows, T. Rowe Price is cutting staff.
2. Freight railroads are growing from China to Iran and Spain, for US continental trains, and other trains from Canada to Mexico.
3. Tariffs may encourage smuggling.
4. The latest weekly American Association of Individual Investors (AAII) sample survey showed a 39% positive and negative 6-month outlook.
5. A study of structural bear markets shows the average breakeven to be about 9 years.
6. The critical operating problems facing the US government is no different than those facing commercial and non-profit activities, a focus on effectiveness, not efficiency.
7. Jaimie Dimon has shared the following thoughts:

• Tariffs will be inflationary
• US reserve currency status rests on military superiority
• Markets are not low
• Lessons can be learned from the turnaround of Detroit and problems created (and elongated) during the 1929 crash
• Dollar weakness helps US multinationals 

As usual, I hope you will share your insights on the various thoughts expressed.

 

 

 

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Mike Lipper's Blog: Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

Mike Lipper's Blog: Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

 

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