Sunday, March 28, 2010

Are We at a Turning Point
or at a Vantage Point?

Shortly we will be receiving first quarter reports from various funds, investment managers and the media. Most will mark that we have passed the one year anniversary of the agreed bottom on March 9th, 2009. The reports will boast of the 40-70% gains off the bottom. Few will focus on the fact that most accounts have not shown a positive return for the last two or three years unless they were significantly in domestic fixed income securities. Almost none will reference their performance high water mark that was reached often in the fall of 2007. As we receive this happy news, the critical question before us is, “So what?”

Does the recovery mean that we can go back to investing as we did in the middle of the “aught,” the philosophies of 2005? Or does the recovery give us the opportunities to modify our investment approaches? In other words, have we reached a turning point to embark on a new strategy? Or are we at a vantage point, able to look both backwards and forwards to make slight mid-point corrections to our trajectories?

I recognize that most of us have difficulty identifying turning points as they occur. With that in mind, I do not see that we are at a turning point. However, I see we are at a vantage point; that a number of trends are changing within the markets. For this kind of analysis, price charts are of value. The following briefs summarize what I see:

1. The near term weakness in the Euro is probably over for awhile. (The structural weaknesses will probably not be addressed until the political will becomes stronger.) In effect I am covering the bet of my view earlier in the year that the dollar would rally.

2. A number of national stock market indexes appear to be ready to change direction. The most prescient of these is the Hang Seng. Perhaps in sympathy, Brazil’s Bovespa is also looking like it is having trouble making progress. Surprisingly, and in contradiction to those trends, the Jakarta Composite is breaking out on the upside. The two major Japanese stock indexes, the Nikkei 225 and the Tokyo Stock Price Index, (commonly known as TOPIX), seem ready to follow suit.

3. In our US market, the industrial group which has led the stock price recovery is the financials. For sometime, further attempts to rally these prices have failed in spite of the recent strength in both Citi and JP Morgan. I find it difficult to believe that a sustained economic recovery won’t be good for the financials. The structure of financial markets is rapidly changing, which may make past history less relevant in thinking about the future. For example the venerable New York Stock Exchange, where I was a member, will produce more revenues from derivatives than the cash markets this year. Leading firms are also making more money out of trading these derivatives, commodities and currencies, suggesting that we are in a different world.

I am not paid to be an observer, but an investment advisor. Each of our accounts has significant differences in terms of its time horizons and ability to assume market price risk of loss. Due to these differences, I find that I am executing different accounts in very different ways. For the first time in a number of years, I have taken a little off the equity allocation of the most aggressive of the accounts. For those more conservative accounts with a low tolerance for yields close to zero, I am selectively adding to their long term equity positions with the belief that over the next several years they will benefit from increasing dividends.

These different tactics are an example of what I believe to be different horses for different courses. The clients’ needs should dictate how an account is managed, not the same house opinion for all accounts.

What do you think?


To Members of Mike Lipper's Blog Community:

For readers who would like to stay current on my uncommon perspectives regarding investing and world markets, join the community by subscribing, at no monetary cost, just your time and interest as well as occasional responses. Simply click the "To Receive Blog via Email" box on the left-side of the screen.

For those already receiving my blog by email, if you would like to recommend this blog to a relative, friend or colleague, the sign-up is located on the left-hand portion of the screen at

Sunday, March 21, 2010

Twenty, Forty, Sixty:
We are Going Global

In a space of just about one week I have been presented with three different examples of people thinking out of their comfort zone. The most remarkable of these is from a freshman at a liberal arts university whose email asked three questions:

1. Describe the growth of international business, and how this growth will impact multinational corporations and national economies in the future.

2. How will companies in the U.S. compete with companies in China, India and other emerging markets in the future?

3. You are the Vice President of International Business Development for Evergreen Solar. How can you use the resources of the international financial institutions to support your projects in India?

None of these questions were asked of me by my Ivy League University. I took many years, with help of the US Marine Corps and some basic analysis work to acquire the background to answer the questions that are preparing this student for the commercial world when she graduates. What is wonderful is that she is comfortable being asked these questions and recognizes how important the answers are to her future.

My reply to her starts with the fact that individual consumers and investors have already become transnational in their outlook and action. Few of the academic world and almost no governments have made the jump over the border into different time zones and customs. While Coca-Cola might be able to meet its debt service requirement without relying on non-US sales, I doubt that it can continue to pay its dividend out of purely domestic operating income.

We received our game plan for success in this global transnational world on or about our first birthday. There were two documents produced in 1776 that shaped our world. The first is our Declaration of Independence, which is a model for a lot of the world. The second and conceivably more important was the publication of The Wealth of Nations, which preached the development of comparative advantage. Author Adam Smith, a canny Scot, figures out if each person could do something better (read cheaper in many cases), we could trade with each other to fulfill many of our basic needs. Merchants became rich being the connectors of this system. One of my rules in looking to get and keep customers is being prepared to do things that make my clients richer. This precept works around the world.

The question as to “Evergreen Solar” is of interest to me in that we have energy technology stocks in our otherwise financial services portfolio. We need to do more work to find whether they are good investments. In general, I shy away from companies that require good connections with the government. So I would look eventually to commercial financing.


One of my sons has been asked to develop an Internet-based sales pitch to be used by mutual fund wholesalers distributing to retail brokers or advisors. As this was his first specific effort along this line, he asked for suggestions on what he should focus. I suggested Global funds. I believe everyone is impacted by overseas prices and trends, be they farmers, local retail merchants and just about every other economic activity in the US. Global investing is not exclusively investing in foreign companies. As a matter of fact, some of the very best global companies are US based. The critical difference is that as a global investor you are looking for the most rewarding investments, wherever they are.


As it is my nature to be generous, “Sixty” could be the average age of a combined Executive and Investment Committee which will meet early this week. Some of the time may be spent on investment guidelines which I feel are outmoded in a number of aspects. One issue of concern regards the asset allocation buckets for US Equities, Non-US Equities and Emerging Markets. These are artificial separations which have nothing to do with the risks and rewards in various securities. Whether we like it or not, almost all our large companies manage their currency risks, some do it well, others do not. Because China is going to be the second largest economy in the world at some point, the allocations system should accommodate it in a large bucket. I am also very concerned by the non- investor friendly court systems in China, India, Japan and California, etc. These factors should be taken into consideration by the managers we hire and not be the purview of a corporate governance document.


I only hope that in 80 years our preferred measure of account is the US dollar and that smart kids in our colleges are making fewer mistakes than we have.

What are your thoughts?


To Members of Mike Lipper's Blog Community:

For readers who would like to stay current on my uncommon perspectives regarding investing and world markets, join the community by subscribing, at no monetary cost, just your time and interest as well as occasional responses. Simply click the "To Receive Blog via Email" box on the left-side of the screen.

For those already receiving my blog by email, if you would like to recommend this blog to a relative, friend or colleague, the sign-up is located on the left-hand portion of the screen at .

Sunday, March 14, 2010

A Rainy Weekend or
a Prerequisite to a Future Bloom?

The continuous rain in the eastern part of the US is for many the number one topic in conversations. We have no doubt that it will stop, and at some point we will see a seasonal bloom in flowers and other crops. As is the wont of many investment market participants, I look at the rain as a metaphor for the market and search for the potential future blooms.

Are we just getting wet or are we “All Wet?”

Almost precisely one year ago the stock market indexes hit bottom. Prices recovered through most of the remaining nine months. Since the beginning of 2010, there has been the feeling that the market has been flat; either awaiting a potential Autumn sell-off or, discounting stronger economic and possibly financial results in 2011 and 2012, resuming the upward momentum.

Just because the market is not putting double digit returns in people’s portfolios does not mean that we are lacking progress. In the year to March 11th, 2010, the average US Diversified Equity mutual fund gained +4.53%, not bad compared with the average fifteen year gain to the same date of +7.55%. While I believe one should not annualize the current rate of gain, it could suggest an approximate 20% gain for the current calendar year. Cut that specious rate in half, and the growth in the value of equities would meet almost all the goals that have been set for various defined benefit plans and most tax exempt institutions’ spending requirements.

The Present Need for an Umbrella

Some economists believe that market valuations are related to the replacement value of the assets on corporate balance sheets, or the Tobin equity quotient. Historically this ratio averages about 65%, due to under-reported depreciation. Some believe that the current 10-year cyclically adjusted P/E ratio, known as CAPE, which is now approximately 100%, is worrisome. The significance of this belief is that it casts doubt on a wave of acquisitions intended to buy cheaper assets than replacing them with new equipment. (I view most large scale acquisitions as being driven by the calculus that for the acquirer it is cheaper to buy a new opportunity in the way of talented people, new products, enhanced market share or denying these to a competitor. Thus, I see market prices rising with the announcements of new acquisitions, particularly those for cash.)

The next rain cloud we are facing is the data showing an increase in the saving rate, or more importantly, a decline in the rate of spending. While this does have a short term impact on decreasing various demand levels, it has two positive impacts. First, with more equity on the part of borrowers there is less likelihood of failed debt. Second, and in the long run more significant, is that with the pay-down of present debt, which is counted as savings, more money will be available for investment through financial institutions in terms of loans and eventually in various forms of equity. From an economic view point there is a higher multiple on lending and investment than consumption.

The biggest storm cloud on the horizon is the recognition of sovereign debt problems. While the world was focusing on the problems of Greece, they should have been looking at the excessive use of derivatives by Italian local governments who are going to court to try to avoid repaying the various global banks the money they owe on derivative transactions undertaken for numerous years. The sovereign debt time bomb is ticking throughout the G-20 countries, where debt to GDP, on average, is over 100% and could approach 120% by 2015. One should point to the growing strength in the twenty largest emerging markets, where debt ratios are around 40%. If this rain squall does hit, domestic interest rates are likely to spike even above the US government inflation and legislative-induced interest rates.

What is going to bloom and when?

As a believer in examining popular views for opportunities to correctly bet against the consensus, my eyes fell on the Diversified Leverage funds. The performance of this group of funds that use leverage either through borrowing or the use of derivatives, on the year through March 11th is +9.59%, or more than twice the aforementioned average US Diversified Equity mutual fund gain of +4.53%. While there are only 51 of these funds, they are similar to an unknown number of hedge funds. (The selection of winning hedge funds is, if anything, even more difficult than picking winning mutual fund portfolios.) Numerous hedge funds style themselves as market-neutral vehicles. If they parallel themselves to equity market-neutral funds, they are up only +1.1% for the time period above. There are very few Dedicated Short Bias mutual funds, with the average showing a negative -7.51%. Shorting successfully is a difficult art form for both mutual funds and hedge funds that we know. All of these performance citations suggest a contrarian bet: to now explore increasing one’s exposure to leverage !!! (All of the performance data is derived from Lipper, Inc. my old firm.)

The contrarian’s view

What else does looking at mutual funds with a contrarian eye suggest? One of the reasons that I expect equities to bloom is the huge preponderance of money going into Taxable Bond funds over the relatively little going into Stock funds. With bond prices likely to drop as inflation rises, one could expect the new owners of bond funds reversing themselves into buying equity funds. My final reason to believe that equity prices will rise is my knowledge of the extent of underfunded corporate and government retirement plans.

If one wants to stay in the quality parts of the bond and stock markets, there is no question that stocks are a much better bet to meet the long term needs. If you are willing to be more aggressive today, you are back to looking at the intelligent and prudent use of leverage. In any case it is good to be an equity investor now.
I do not know when we will be in bloom, but I can wait it out as long as I am in a dry spot. Have you brought down your umbrella yet?

To Members of Mike Lipper's Blog Community:

For readers who would like to stay current on my uncommon perspectives regarding investing and world markets, join the community by subscribing, at no monetary cost, just your time and interest as well as occasional responses. Simply click the "To Receive Blog via Email" box on the left-side of the screen.

For those already receiving my blog by email, if you would like to recommend this blog to a relative, friend or colleague, the sign-up is located on the left-hand portion of the screen at .

Sunday, March 7, 2010

“End Game” Training
for You and Your Heirs

Most of us do not have up-to-date estate plans on how we want our heirs and/or charities to act. First, we have to decide whether or not we envision our current operating activities surviving us. Second, we need to contemplate a rapacious US Internal Revenue Service putting a high price on our business assets. Having been consulted by these people, I know one of the standards in placing a valuation on financial services companies is to determine what a third party would pay for the assets. There is a huge gap between the value that a competitor might pay for a sound operating business and what would be paid by an absentee owner of the free cash flow that a company can throw off. Taxes will have to be paid before an owner’s heirs get their money unless an installment payment is negotiated. These considerations lead to the need for training.

Replacement Training

The reason most people become entrepreneurs is that they do not fit comfortably within others’ organizations. As my good wife Ruth reminds me, like many entrepreneurs, I do not deal well with chaos that I do not create. Rarely do entrepreneurial people enter most industries with the object of managing people. They want to manage money, ideas or a few key relationships. While there are numerous trainees in our business community, they are being trained as functionaries to complete various, at times, important tasks. Rarely is time devoted to the training required to make big, as well as everyday, decisions. Talented entrepreneurs are extremely well-disciplined internally and require the exacting work of subordinates. However, it is natural for these Type “A” personalities to immediately make important decisions themselves, perhaps consulting perceived experts. Rarely to they go to key subordinates and ask them how they would make key decisions. Even rarer do they ask how the decision of the subordinate would be different than that of the owner. (Unless this is done, the feedback is “copy-cat,” and may not be representative of what the subordinate/leader-to-be will do.) One of the most difficult tasks of a leader with a potential leader is to let the manager in training make mistakes. All mistakes should be learning experiences for both the teacher and the pupil, but there is a limit as to the price the firm can pay for this kind of learning experience. Some portion of each day, week and month will need to be devoted to this crucial training,

If you can not locate acceptable entrepreneurs-in-training, then your business heirs need to have a well-developed plan to sell the assets that recognize the diminished value of the company without your presence. Hopefully, the IRS will accept the immediate sales price as the valuation for estate tax purposes.

Heirs Training

The various administrative details of settling an estate can be handled by lawyers, accountants, executors and trustees. All they are dealing with is the numbers that you have left behind. For many of us, our concern is for the lives of those that we have left. If we want them to conduct themselves in a particular fashion, we must train them to do so. One should not rely on the training your heirs got growing up. They are different now and most importantly, their financial lives as well as their emotional lives are different. Just as one needs to find the time to train someone to succeed the entrepreneur in business, one should commit to training your spousal partner at home, children, grandchildren, nieces and nephews. All can learn that the ultimate destruction of wealth comes much more from excessive spending than from investment mistakes. I have seen too many instances where money has been spent on the pleasures of the moment, acquisitions of assets that have done little to improve people’s lives now and more importantly in the future.

Some of the heirs need to become aware of various investment considerations, this may be particularly important in the succeeding generations. The financial aptitude of the heirs, including favored charities, has a lot to do with the proper construction of the investment plan that underlies the estate. A few heirs can be given some well-earned discretion, others not. Life-long spending patterns are an important input into these plans. One should examine the practices of favored charities in order to develop an appropriate giving plan. Some wonderful and very worthwhile groups lack some financial discipline or expertise and should be supported with those limitations in mind.

External Help is Available

Some people of wealth will want to develop their own plans and training arrangements. However, there are external sources that are available that can provide both educational and investment expertise to the extent desired.

I would be happy to discuss this off-line with anyone in this situation.

A Post-Script

“Whether you are doing it or not, it is happening.” This belief in succession training for business owners was the essential message I gave recently to an audience of financial services entrepreneurs who live or work near Summit, NJ. My talk was before a the second meeting of a group called The Summit Roundtable (TSR), which was modeled loosely on the Greenwich Roundtable. The group needed a speaker that would attract members of the widely defined financial services industry before the group started to attract potential clients for hedge and private equity funds.

The Inevitable End Game

The key from my point of view is that the termination of one’s control of operating and financial assets is inevitable, but the date is uncertain. To have a reasonable chance to accomplish to what we want of our lives, we should plan and probably increase our training efforts.

To Members of Mike Lipper's Blog Community:

For readers who would like to stay current on my uncommon perspectives regarding investing and world markets, join the community by subscribing, at no monetary cost, just your time and interest as well as occasional responses. Simply click the "To Receive Blog via Email" box on the left-side of the screen.

For those already receiving my blog by email, if you would like to recommend this blog to a relative, friend or colleague, the sign-up is located on the left-hand portion of the screen at .