Sunday, February 1, 2015

Learning is the Key to My Investing


You are probably a recipient of lots of uncorrelated information and impressions. I am as well, but because of my obsession of always thinking about investing for clients I try to find investment inputs to almost everything that comes my way.  Most often I attempt to see available information, in other words inputs that others don't see.

My sense of this past week is that we are transitioning into more dynamic markets and there are growing forces that will stampede equity markets. Thus I am maintaining my market prediction that some time within 2015 we will see a + 20% to -20% or both movement in equity markets.

Lessons from weather

As beauty is in the eye of the beholder, the impact of weather is very much influenced by location and preparation. When I finished last week's blog, in the greater New York area we were dealing with excited announcements of a forthcoming blizzard. (Quite possibly the loudness of the warnings of an incoming multi-foot blizzard was due to the underreporting in 2012 of the oncoming storm "Sandy" when we lost electrical power for two weeks and New York had a particular subway inoperative for a year after the storm hit.)

When last week’s “storm” deposited only a smattering of inches of snow, many within NYC were upset with the closing of schools, offices, and subway lines. For some, if there was not the severe impact predicted, it was like it didn't happen. For those at the eastern-end of Long Island and much of New England the multiple feet of snow was a very different story. Even Nantucket, a summer home for the rich and famous lost all boat and plane connections to the mainland along with loss of electric and communications.

Because the airlines were fearful of a blizzard, they cancelled many flights (including our own) for what would have been the second major day of the storm as they were repositioning their planes to safer spots. Luckily for us our travel agent was able to secure two seats on one of the last flights out of Newark Airport.  Afterward, East Coast to West Coast travel was suspended for a considerable time.

I believe that there are numerous investment lessons one could learn from this and many major storms:

1. Location of persons and assets is critical to risk exposure.

2. Uncertainty is normal and we mislead ourselves believing in a high degree of certainty, particularly when expressed in finite numbers.

3. While the "official' forecasts displayed a range of possible outcomes, the media and their brothers/sisters in the political structure focused only on the most draconian possibilities.

4. In the right environment,  people panic.

5.  Recovery is normal after severity.

We will see whether the storm predicted for today and tomorrow in New York, New Jersey and New England will be real.

Misreading economic forecasts and data

During the last week, the Director of the Congressional Budget Office testified to Congress on the Budget and Economic Outlook: 2015 to 2025. There was little commentary within the investment sandbox because he did not see rising deficits until 2018. However, to those considering our TimeSpan L Portfolios TM approach, the forecast is relevant to the third segment, the Endowment Portfolio, which is designed for investing from five to fifteen years. I have less confidence in the Director’s numbers than I do in his projections as to what will cause the deficit to rise. His four key factors were:
1. Retirement of the Baby-Boom generation (most however, won't be able to leave economic production)

2. Expansion of federal subsidies for health insurance

3. Increasing health care cost per beneficiary. (means greater longevity)

4. Rising interest rates on federal debt

My US Marine Corps heritage and concerns about worldwide threats make me wonder how we can avoid a major increase in military and related spending.

Further we live in a dynamic global society where change is accelerating. One example can testify to some of these changes. According to the Financial Times, in 1960 GM was the most profitable US company with earnings of $7.6 Billion. In 2013 Apple* was the leader with $37 Billion. (If one annualizes Apple’s current quarter's rate the profits would double for its current fiscal year.)  To me if one works the numbers, the profit per employee is staggeringly different; $12,666 for GM in 1960 and $399,568 for Apple in 2013. Part of the profit growth is that while both companies are global, Apple is getting much higher profit production than GM. Thus, I am seriously questioning the CBO's future estimates. I would be much more comfortable with a wide range of estimates, with some recognition of the level of uncertainty.  (I hope I learned from the blizzard last week, that the same storm, or passage of time, could give me the different snow fall results from Boston to New York.)
*Owned personally or by the private financial services fund I manage

Fund investors and traders are not waiting for clarity in 2015

The following data points show different attitudes:

1.  In the week ending January 29th, US fund investors added $8.9 Billion to Fixed-Income and $3.1 Billion to non-Domestic Equity funds while withdrawing a little from Domestic Stock funds. On a performance basis, the average International fund on a year-to-date was up 1.75% as the only General Equity fund to rise. (A number of Specialized or Sector funds also rose.) Bond funds are continuing to show good performance this year led by General US Treasury funds and Corporate Bond funds.

2.  One of the ways to measure bearishness is to calculate the ratio of the size of short sales to the average daily trading volume. I pay particular attention to this ratio for the more speculatively priced NASDAQ traded stocks. In the last reported period, the ratio was 6.54 days, up +27.9% from the prior reporting period. While this indicator is expressing a bearish point of view, it also identifies the level of potential buying that must come into the market to collect or cover bets. If the short ratio gets to be large, one could see a sudden spike rally.

The Super Bowl is different in 2015

While I have watched and attended  numerous Super Bowls, this one is going to be very different for me. In the past I hoped the officials made good calls on contentious plays and I hoped that the television commercials would produce added volumes for the advertisers and earnings for their shareholders. Like a professional sports game with poor officiating, in the investment arena a sound game plan can lose. The single most important contributor to the sport's revenue is the various television contracts, each collectively bargained contract determines how much will go to the players and their retirement needs.

This year I can concentrate on the playing skills of the two superb teams with quite different tactics and strategies.  The reason for the change is that after 20 years of good performance and service I resigned as investor advisor for the defined contribution plans of the National Football League and the NFL Players Association.

Question of the Week: I appreciate what you have shared with me in the past. Are there particular current items that you follow that determine your long-term strategy?

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A. Michael Lipper, C.F.A.,
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