News & Reactions - Weekly Blog # 833

 

         

Mike Lipper’s Monday Morning Musings

 

News & Reactions

 

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

   

       

 

Current Picture

For most purposes, the single best measure of the US stock market is the Standard & Poor’s 500 Index. After four weeks of decline, year-to-date through Friday the SPX has retreated 5.94% from its high, although it is still up 5.46% from its low year-to-date. So far, it has given back more than half of its gains for 2024. For the same period the Dow Jones Industrial Average (DJIA) has 15 stocks rising and 15 falling. Probably more significantly, only 6 of 20 Dow Jones Transportation Index stocks have risen. Even more significant, only a single market index rose out of the 32 domestic and international stock market indices that S&P Dow Jones tracks weekly. Expanding the universe to include commodities, currencies, and index funds, only 26% rose this week.

 

For those who wish secondary inputs, the following facts may be of interest:

1. The bullish portion of the weekly AAII sample survey is at 38.3%. A few weeks ago, it briefly reached over 50%. (Market analysts have labeled the AAII readings a contrarian indicator, believing the index represents retail investors who are always wrong.) That is not true! While retail investors are often believed to be wrong at turning points or late to a change, they have a reasonably good long-term performance record. In this case the over 50% reading was achieved in a quick run up, which subsequently dropped to its current 38% reading. This is not far from the mathematical neutral of 33% for each of the three sub-indices. On a long-term basis they may well be correct.
2. The only large geographic region showing growth in the number of listed companies is Asia. Thus, it is somewhat surprising that both Morgan Stanley and HSBC are laying off Asian investment bankers. These are smart people.
3. Residential insurance is absent from the normal inflation calculation. While it is of no significance for renters who have seen no important increase since 2018. Homeowners over the same period have seen their insurance costs go up over 50%. (I wonder how many other omissions there are in government data,)
4. Almost all attention in the forthcoming election has been focused on the top of the ticket. To me this is unwise. Whichever candidate sits in the White House in January will be a lame duck. This President cannot help members of Congress get re-elected in 2026, 2028, and 2030. There is a reasonable chance many voters will not vote this year due to the presidential candidates. To the extent this is the case, the missing voters will come from the center of their respective parties. This will allow the fringe elements in both parties to get more power to shape congressional committees.

 

China Impacts & Questions

Whether the US likes it or not, China is becoming the nation that will impact world trade and growth. In the first quarter of 2024 China’s GDP grew 5.3%, while US GDP grew 4.6%. Something curious happened with some of the Chinese numbers. Industrial production gained +6.1% while prices fell -2.7%. We know that China is selling scrap copper and other strategic products to Russia. (This should cast some doubt on Chinese statistics and their meaning.)

 

Long-Term Considerations

The Managing Director of the International Monetary Fund (IMF) is concerned that growth in the twenty's decade will be “tepid “. Jaime Dimon, CEO of JP Morgan Chase (*), has questioned the general belief that petroleum usage will peak in 2030.

(*) A position held in personal accounts.

 

The standard M&A game is getting more imaginative, at least in the mutual fund management company arena. Amundi, the French investment manager, is selling its American fund assets to Victory Capital for a minority interest in Victory Capital. What made this deal attractive to both participants is that each gained access to the others distribution functions in their home markets, negating the need to build an independent administrative base.

 

The Managing Director of the IMF is concerned about global growth, referring to this decade as the “tepid twenties”. Her concern about growth is partially based on the low level of productivity in much of the world. I share her view, particularly focusing on the US. If you break apart the productivity gain between financial and labor, I suspect labor’s contribution would be quite low. My guess is excessive regulation and less than useful education is holding us back.

 

A recent study shows that interest in the current election is probably at a low point for youths, with only 32% of eligible youths showing any interest in the election. In 2020 it was 56% and 2008 it was 67%. Within two generations these non-voters will be in control, which happens to be when current retirement capital will be feeding some of the current beneficiaries. GOOD LUCK TO ALL.

 

Any Thoughts?

 

 

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Mike Lipper's Blog: Better Investment Thinking - Weekly Blog # 832

Mike Lipper's Blog: Preparing for the Future - Weekly Blog # 831

Mike Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830

 

 

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Better Investment Thinking - Weekly Blog # 832

          

Mike Lipper’s Monday Morning Musings

 

Better Investment Thinking

 

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

   

       

 

The late and great Charlie Munger gave Warren Buffett his greatest compliment when he called him a “thinking machine”. His compliment implies that Warren is always thinking and trying to improve his investment process. In last week’s post-script at the end of the blog I introduced the concept of needing to focus on the process of selling. Early this week I had a conversation with one of the more perceptive members of a monthly investment discussion group. He was concerned that they hardly ever discuss the process of selling.

 

Selling is often prompted by the need to raise cash or the need to free up cash for reinvestment. Currently, we have quite possibly entered a period where it would be prudent to develop a meaningful cash reserve for later equity reinvestment. Admittedly, it runs the risk of not fully taking advantage of the rising stock market.  It is with that thought in mind that I am introducing the thinking of Professor George M. Calhoun, with some concern as to the structural risk it might expose.

 

George’s views have been shaped by the following experiences.

• For 25 years George worked for various tech companies.
• He is a Professor at The Stevens Institute of Technology, where I am one of the trustees.
• At Stevens, George supervised the development of the Hanlon Financial Center, a live trading room.
• He won a National Science Foundation award for creating the Center for Research Toward Advancing Financial Technologies (CRAFT).
• George is a regular contributor to Forbes.

George Calhoun has written extensively on the causes of inflation, in discussions on: Dangers created by Money Market Funds, Cash Shortages, Recession Signal, Dry Powder, and Contrarian Indicator, parts of which are included in the link to the article below.

 

 

Collateral Damage From Fed Policy (3) – Money Market Funds, A ‘Powder Keg’? (forbes.com)

 

 

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Mike Lipper's Blog: Preparing for the Future - Weekly Blog # 831

Mike Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830

Mike Lipper's Blog: Fragments Prior to Fragmentation - Blog 829

 

 

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Preparing for the Future - Weekly Blog # 831

          

Mike Lipper’s Monday Morning Musings

 

Preparing for the Future

 

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

   

       

 

The fundamental job of an equity investor and manager is to grow current assets to fulfill future needs. Since we don’t know what the future will be or when it will be, we should consider a range of possibilities. My training at the racetrack and the US Marine Corps supports viewing the various futures through the various lenses of security analysis. I cannot think of a more difficult set of conditions than those facing us today.  

 

The possibilities range from the outmoded thinking of present world autocratic senior leaders (Biden, Trump, Xi, Putin, and similar) to unknown people with more scientific knowledge, but little management experience. To use an expression from the track, the odds-on-bet for the foreseeable future is that our present leaders will leave the scene relatively soon. They will probably be largely replaced by leaders two generations younger, who think differently and whose mental languages are different than what we have learned. 

 

Allow me to show you a mathematical approach from my world of mutual fund analysis. My old firm continues to report the weekly performance of mutual funds broken into seven investment objectives based on the securities in their portfolios. Most of the assets are in US Diversified Equity Fund investment objectives, which are divided into 18 peer groups. In the first quarter of 2024 there were 5 peer groups where the average performance was double digits. Interestingly, for the ten-year period there were 6 peer groups with double-digit winners. Four out of the six were repeaters. While all 18 performance peer groups generated double digit returns for the most recent 1-year period, only one generated double digit returns for two years two for 3 years, and 13 for five years. This suggests that immediately prior to the pandemic was a good time to invest in the average US Diversified Equity Fund. Accepting below average returns in the short term produced good results in the long term. This further suggests that picking the right year to sell an investment is more important than the right year to buy. However, as with almost every betting rule, the opposite can work. 

 

I believe you need to pay attention to the nature of the period when buying or selling. Investors in the US market should probably recognize that the average performance year is generally single digits, which should be evaluated relative to the performance of peers. Broader considerations should be left to double digit years, like now. Bet against the crowd if you intend to sell in a holding period shorter than five years.

 

Management Structure is Not Optimal 

The President’s cabinet is non-voting and is at best an advisory group. Large meeting tables of decision makers should be avoided, be they for political organizations, business, or non-profits (including educational and medical groups). The groups needing large meeting tables are not likely to produce dynamic results. President George Washington had a cabinet of 4 people, the secretaries of State, Treasury, and War, plus the Attorney General. Our present Cabinet has 26 members, 15 Department heads and 11 Cabinet level officers. 

 

Another Focus Should Be Updated 

 I don’t have the underlying data on our government leaders, but I suspect the majority have not spent operational and/or educational time in Asia or Africa. As a global investor I believe it is essential to correct this to effectively deal with the fundamental problems coming down the road. 

 

PS 

This week there have been a number of articles about the death of Daniel Kahneman, a Nobel prize winning psychiatrist and developer of behavioral investing. His basic premise was that investors are not rational and invest more for psychological reasons than sound investment reasons. This discussion may bring us back to rational decision making with your help.

 

Like most analysts and others commenting on investments, I have done the easy half of the job by supplying my thoughts on the buying function of investing. The much more difficult function is the disposal of investments, which is normal for the investment related committees of the two tech-oriented universities on which I serve. The reason for this one-sided effort is that making a buy decision is relatively easy.

 

By far the more difficult task is deciding to sell all or a part of an investment, which is a much more a personal decision and much more complex. The decision process should deal with some or all of the following topics:

• Likely reaction when other critical investors find out.
• Tax implications.
• Impact of the decision on the rest of portfolio.
• Dealing with beneficiaries.
• Legal aspects.
• Performance results.
• A least 10 other factors

I intend to share my impressions over time, with the thought that my audience of bright, experienced people will share their reactions. The reason I mentioned the groups of bright people I am connected with is that I learn how they approach various investment problems and use this information to address issues we all need to manage.

 

Next week, most of the blog will be devoted to an article produced by a brilliant well-rounded Professor from the Stevens Institute of Technology. The article explores how government actions had an unintended inflationary impact.

 

I am very interested to hear your reactions to this experience.

 

     

 

Did you miss my blog last week? Click here to read.

Mike Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830

Mike Lipper's Blog: Fragments Prior to Fragmentation - Blog 829

Mike Lipper's Blog: Collateral Rewards, Risks, & Opportunities - Weekly Blog # 828

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

American Voters Win & Lose - Weekly Blog # 830

 

         

Mike Lipper’s Monday Morning Musings

 

American Voters Win & Lose

 

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

   

   

    

Probable Real Winner in November

While it is unknown which candidate will be elected President, the probable real winner is the American voter. Unfortunately, victory comes at the price of worse government.

 

In almost every poll taken, it is clear most voters are unenthusiastic about the numerical winner. If the number of unenthusiastic and non-voters were aggregated, they would likely represent the majority of the country. For all intents and purposes, based on todays’ perceptions, the occupant of the White House will be a “lame duck”. The President will have limited influence on those occupying seats in Congress for 2026 and 2028. As most Americans prefer Congress pass very little legislation, they are the likely winners in 2024.

 

However, the voters are also losers. While members of Congress will either wear red or blue uniforms, but in meeting rooms they will split into numerous caucuses. As the number of voting groups goes up, compromises will produce the weakest bills. More importantly, none of the splinter groups will have national campaign chests or the talent of the national committees. Odds are the US structure will look similar to  the less efficient European Parliaments. A factor likely to slow international agreements.

 

Chairman Powell Attempts to Teach Economics

In the press conference following Chairman Powell’s testimony before the Houses of Congress, he indicated that interest rates are unlikely to be the main weapon used to bring down inflation. Furthermore, he said it is possible the “Fed” is likely to raise interest rates under certain conditions.

 

This pronouncement came as a rude shock to those viewing control of short-term interest rates as controlling inflation and the economy. The Board of the Federal Reserve System made it unanimously clear that the causes of inflation are multifaceted and that control of short-term high-quality rates would not control inflation.

 

The rate of inflation is an inexact measure of the rate of change in prices, as there are many influences on the aggregate level of price changes. These influences can be ranked and put into three broad groups, governments, private sectors, and natural forces.

 

Their impact on inflation is not well-understood. Too much attention is focused on government-imposed income taxes. Also important are business taxes, estate formation and related taxes, and regulations of permitted actions. Additionally, State, Municipal, and foreign taxes can also be inflationary. Changes in demographics, climate, technology, and wars also have an impact, which is beyond the purview of the Fed and Congress. While there are a few more narrowly focused inflation measures, they are not generally used in making decisions. Bottomline, inflation should not be treated as a single number of any precision.     

 

News That May Impact Security Prices

1. 16 states still have employment rates below pandemic levels, with New York and California leading the list.
2. We don’t measure the flight from the US dollar correctly, as we don’t include the purchase of Bitcoin, Gold, Manhattan Real Estate, and other hard commodities requiring the exchange of dollars.
3. Narrowing high yield spreads.
4. EPS growth leveraging revenue growth.
5. The ratio of AAII Bullish views to Bearish is near a record 2.2 times.
6. Private Capital is short of opportunities and talented staff.
7. Defaults are expected to grow.
8. Trading liquidity to dry up with a switch to smaller caps.

           

Please share your reactions so we can learn.                                              

 

Did you miss my blog last week? Click here to read.

Mike Lipper's Blog: Fragments Prior to Fragmentation - Blog 829

Mike Lipper's Blog: Collateral Rewards, Risks, & Opportunities - Weekly Blog # 828

Mike Lipper's Blog: Alternative Futures - Weekly Blog # 827

 

 

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Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

Fragments Prior to Fragmentation - Blog 829

 

      

Mike Lipper’s Monday Morning Musings

 

Fragments Prior to Fragmentation

 

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

   

 

 

Historic + Military Learning

Some have said, if you scratch a good security analyst a historian will bleed. If you add in two other variables, learning from military training and exposure to the racetrack, you will understand much of my thinking. In fearing World War III, one should start with the German General Staff study of the American Civil War and the Peace efforts prior to and post WWI. Long periods of relative peace can be achieved most of the time if intelligent leaders continue to plan for economic and military hostilities.

 

Since we don’t know what the future will bring, we should study every fragment of information available and track developments that might lead to dangerous conflicts. Few peacetime leaders are equipped to be successful war leaders, and often they make war inevitable. I believe a lesson from one of the various “war colleges” is that war is another way to conduct political change. Our political leaders increasingly use an “anything goes" approach to cling to power, ignoring the vulnerabilities they are exposing for our adversaries to exploit.   

 

In retrospect, it has become increasingly clear that WWI and WWII were inevitable. The threat of nuclear war and some of our world leadership has held off WWIII, hopefully forever. Due to improvement in tactical nuclear and other weapons, there is greater risk today than in the past. We need to review all fragments as they appear and be watchful of those which could harm us.

 

Dangerous Fragments Past & Present

In the 1920s, the general urban population looked askance at criminal controlled bootlegging but enjoyed the local speakeasies. Today’s version of this attitude is the general disrespect for most members of Congress. Although they continue to support their local representatives, or for the younger set, the local ‘pusher”. We seem reluctant to reform our own process of offering debt forgiveness in the hope of gaining votes. They don’t seem to see these stimulants as bribes, much like the circuses that led to the fall of the Roman empire.  

 

Daily Stock Markets React to Central Banks Words

On Thursday, 27 % of the “Big Board” stocks declined, with 38% falling on the NASDAQ. The next day, 64% of NYSE issues fell, with 63% falling on the NASDAQ. The only difference was many traders finally believed the clues given regarding the possible number of interest rate cuts this year. (They paid no attention to the view that the next rate move by the Fed could be up.) Most of the time investors stay focused on their long-term needs and don’t react to politicians and pundits.

 

Fragmentation Becoming More Popular

On many days more stocks go up than down. This week, 21 of the 28 foreign markets Barron’s tracks rose. However, in the US only the momentum index has gained double digits over the last two months.

 

What is the Remaining Upside Left?

While it is popular for market leaders to mention their gains from the  bottom, the payoff for today’s investor is what is left? Jeremy Grantham, Chair of GMO, has generally held a bearish view but has generated good long-term performance for the funds he supervises. He mentions that if one uses the Shiller P/E, the market is in the top 1% of its history. A more significant observation is that many analysts use both P/E and profit margin, which are linked, so they are double counting. (Profits = Earnings, which is the driver of margins)

 

Today’s Parallels with WWI And WWII

Russia is in fighting a war in Eastern Europe, with Western Europe supporting the locals. The US is in a trade war with China and is constraining trade. Our opposition is getting stronger, although we are having trouble convincing people that they need to fight. This reluctance exposes our current weakness to our adversaries, giving them reason to cheer.

 

The markets generally seem to be ignoring the geopolitical hot spots accumulating around the world. There seems to be a perception that we can ignore these problems as they are occurring in some distant land. However, these problems are now surfacing closer to home and their citizens are increasingly arriving at our borders and making their way into the country. The situation is putting significant strain on resources and budgets, at a time when pet projects are already being funded in the hope of attracting the support of an expectant electorate. This spending is unsustainable in the long-term and creates additional vulnerabilities for our adversaries to exploit.  

 

 

 

Did you miss my blog last week? Click here to read.

Mike Lipper's Blog: Collateral Rewards, Risks, & Opportunities - Weekly Blog # 828

Mike Lipper's Blog: Alternative Futures - Weekly Blog # 827

Mike Lipper's Blog: Bullish Chatter Leaves Out Useful Info - Weekly Blog # 826

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.