From One Week to Eternity with Reason - Weekly Blog # 543

Mike Lipper’s Monday Morning Musings

From One Week to Eternity with Reason

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

Investors’ Dilemma
“Buy and hold forever” is an easy and dangerous command that investors’ issue to themselves. The one guaranteed aspect of life and investing is that conditions change, often in surprising ways. Because making investment decision is frightening, there is a natural tendency to make as few decisions as possible, recognizing that we might be wrong. This ignores that everyday an action is not taken is a decision in itself. The one sure bet is that the conditions that underlie any decision are likely to change, both for the investor and the investments, be they individuals or institutions.

One way to deal with a big problem is to break it up into a series of smaller problems. That is why I trademarked the TIMESPAN Lipper Portfolios TM. This approach allows the individual and portfolio manager to select the appropriate strategy and tactics for each important time slice. (I would be pleased to discuss this application to subscribers’ own needs.)


Professional Portfolio Managers’ Commercial Dilemma
Professionals are hired to think about and do something with the money entrusted to them. Since thoughts can’t in and of themselves be measured, many investors evaluate their investment advisers solely or largely on the activity of buying and selling in their accounts, when at times it makes more sense to do nothing. (Dividing the long-term records into high and low turnover managers, the low turnover managers tend to produce better investment performance records.)


What to Act on and When?
The key is in the straw, that is the final straw that breaks the camel’s back. The more risk averse among us may prefer to wait to a time closer to the final collapse. Again, both the professional and individual investor should be conscious of impending changes to the investors’ condition.

Evaluating the changing conditions of the underlying investments each week, I peruse lots of hard and soft data in an attempt to understand their implications for the various time spans for which we are responsible. The rest of this blog is devoted to what I looked at in the latest week and why they might have longer term implications. 


Markets

• US stocks appear for the second consecutive year to outperform US Treasuries. This is the longest such period since 1922-28. (Caution warranted)

• The six largest countries (G6) are again spending a smaller portion of their GDP this year than they did in 1948. (We won’t be able to fulfill the population’s demands if we can’t deliver goods, services, and people inexpensively and efficiently. This could be an opportunity.)

• By 2050 the cohort of 65+ will more than triple. (Potentially important for both the real work force and healthcare). Adding to these trends is the likelihood that babies born today will be alive for one hundred years.

• Each week The Wall Street Journal publishes weekly price changes for stock indices, currencies, commodities, and Exchange Traded funds. In the latest week, the top three performers that all rose approximately 7% were commodity related and were down considerably earlier in the year. The next three largest gainers were foreign stock markets that likewise were recovering from earlier declines. (I am wondering how much of these extraordinary gains are from short covering. The general characteristics of the six are sudden/rapid changes in perception, low level of present market liquidity, and the availability of margin to support derivatives.)

• NASDAQ(*) reported that the trader who defaulted on $134 million of derivatives will pay back the default. (This probably reassured the derivative market that we aren’t facing a mini repeat of the Long-Term Capital Management insolvency). 

• There is a published market rumor that Mass Mutual Insurance is selling Oppenheimer Management for approximately $5 billion, which would equate to 2% on assets under management. This would be considered a good price in today’s market. (If the rumor is accurate, the buyer is also in the business and can use some of the investment and marketing talent. Insurance companies have regularly entered and left the mutual fund business. Cross-selling is more difficult to do well, resulting in volatility and risk)

• The Dow Jones Industrial Average and the S&P 500 developed price gaps. Most of the time prices can’t move much until these gaps are filled. (Short-term caution) 

• The market was unexpectedly kind to my examples of the type of stocks that would be suitable for adult children that are not focused on investing (Berkshire Hathaway (*) and those suitable for grandchildren as a long-term change agent BYD (*)  

Bonds

• According to a Barron’s, an index of high-quality corporate bond yields has broken through 4% vs. 3.19% a year ago. According to the perceptive Marcus Ashworth of Bloomberg, this could be caused by there not being enough high-quality European debt to meet the demand in a period when European companies are growing at half the rate of those in the US. In addition, it is expected that for the next several years there will be little to no net new German government issues. (If this is correct there are two likely results. The first is greater demand by Europeans for US debt and second that US companies will issue Euro backed debt. American companies have substantial European operations and sales.)

• The Financial Times devoted a full page to large private equity shops that have become even larger factors in the private debt market. These and other non-bank credit providers have taken significant market share from the traditional bank lenders by employing heavyweight deal makers, thus improving the certainty of closing with less stringent terms (covenant-lite) in exchange for higher interest charges, which in some cases are floating rates. Moody’s (*) has noted that 80% of the currently marketed issues are covenant-lite. Howard Marks is quoted as saying “The seven worst words in the world are: Too much money chasing too few deals.” (If there is an actual or rumored sudden credit market problem involving leverage or derivatives, it is very likely that the stock market will feel it.)

Trade

• The three fastest growing export markets for the US since 2001 are: China 580%, Hong Kong 140%, and Mexico 140%. (In looking at the three leaders I wonder how the transshipment numbers are handled. The whole practice of global supply chains makes looking at national data questionable, at least to me. Are Apple (*) cell phones US, Chinese, Korean, Taiwanese, or Japanese products?

• In 2016 Asia outpaced North America in patent filings by more than 3 to 1. (There is a legitimate question as to the commercial value of some of these patents.)

Mutual Funds

• Utilizing the Lipper Investment Objective Fund Indices for the week ended Thursday, the leading categories were: Precious Metals +4.59%, Global Natural Resource +3.15%, European Funds +2.60%, Financial Services +2.37%, Pacific Region +2.32%, and Emerging Markets Stock funds +2.05%. In each case these categories are recovering from earlier poor performance. Not a single one of these categories beat the S&P 500 Funds Index +10.83% on a year to date basis. Small-Cap Growth +21.48% and Health/Biotech +20.64% almost doubled the market measure, but they are also playing catching up for longer periods of underperformance. (There appears to be much greater selectivity required to come up with a top performing investment objective. This suggest narrowness of leadership, which is more prevalent around peaks.)

• The dominance of very selective ETFs is probably due to a relatively small number of trading organizations like hedge funds or leveraged investment advisors. For example, one ETF drew in more net inflows than all other equity ETFs. The SPDR S&P 500 took in $2.7 billion for the week compared to a total net equity fund inflow of $2 billion. The figures are from my old firm, now a part of Thomson Reuters.

Working Conclusion
There are short-term trading opportunities and after at least a measurable downturn, longer-term opportunities.


(*) A position in these securities are owned in the private Financial Services fund that I manage and/or I own personally.
       

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