Lazy Summer, a Good Time to Change Thinking - Weekly Blog # 639

Mike Lipper’s Monday Morning Musings

Lazy Summer, a Good Time to Change Thinking

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

In the northern hemisphere summers often usher in the most enjoyable part of the year, with time to recuperate from winter’s focus on survival. In our trading/investing world, the summer is often a period of relatively low transaction volume combined with a lot of vacations. We contrarians scan for changes, while the majority shift their attention elsewhere. The old quote given to planners captures our anxiety “if everything seems to be going well, you have obviously overlooked something”. While I cannot predict the future, I know that recognizing change early is highly productive in making money and or avoiding significant loses.

Stock Market Leadership is Changing
Following on last week’s blog which sensed that some change is occurring, I looked at the weekly performance of 103 mutual fund investment objective peer groups. Using fund performance data from my old firm, year to date through Thursday there were only 27 peer groups rising more than the +1.04% gain for the average S&P 500 index fund. However, for the week there were 84 peer groups that beat the Index Fund’s gain of 0.64%. Clearly, we have gone from a minority of peer group averages lagging, to a majority doing better. What is happening?

Perhaps the individual fund peer group performances give us a clue. The average Large-Cap Growth fund gained +14.90% year to date but only rose +0.61% for the week, trailing ever so slightly the +0.64% gain for the S&P 500 Index funds. Their significant overweight in technology was not likely the cause, as the Science & Technology funds average gained +1.53% and Global Science & Tech funds gained an even higher +1.87%. I suggest that while Large-Cap Growth Funds had an oversized position in tech, they did it in relatively few stocks compared to the more diversified sector funds. Thus, the problem may well have been in an over commitment to a dozen or so big tech holdings. Another possibility could be how the average Large-Cap Growth Fund handles its substantial flow of new money, which came in after good relative performance. To keep the number of holdings in the portfolio manageable, managers bought more of what they owned, as they by definition were the most liquid stocks in the market. Furthermore, an army of analysts were predicting a continuation of good earnings in these trying times. This coming week we will see whether the rosy estimates were close to being correct.

There is another way to look at the evolving change in market leadership.

• Some “value” funds and a significant number of sector funds are doing better than the S&P 500 Index, which is market-capitalization weighted.
• Many currencies are doing better than the US dollar, leading to weekly gains of +2.19% for Global Sector funds and +1.68% gains for World Equity funds. There are a number of explanations for these market trends:
• Numerous countries are apparently dealing with COVID-19 better than we are, with the economies of both Europe and China doing better. 
• The US stock market has become extremely bifurcated, with perhaps 10% of the stocks contributing to most of the indices’ gains. If most of the market does not catch up, there is a question as to how much longer this rising market can last.
• The current political campaign is depressing. The views of various candidates are reducing enthusiasm for their positions, both among their followers and the relatively limited number of independent thinkers. 
• There is little belief that the US is likely to have good times immediately ahead, partially due to our debt burden at all levels of society. 
• Without an expanding real economy, we are likely to see an increasing number of business and personal financial failures. 

What to Do?

1. The first thing many investors need to do is switch their primary interest from security selection to portfolio allocation, including available cash for investment. 
2. Create or update a schedule of likely cash withdrawals.
3. Organize the portfolio and identify holdings according to your current thinking, e.g. relative current risk, assets that are hedges or are held to address specific concerns, comfort levels, any other way that might drive decision making.
4. Array your assets in each of the above buckets and see if the allocation is appropriate.
5. In this lazy summer season and probably before mid-August, focus on your largest allocation and reduce the biggest allocation bucket by 10%. This will increase your flexibility to reinvest opportunistically.
6. Keep reducing excessive allocations by 10% quarterly until comfortable.
7. Begin increasing your discomfort by making new investments with specific goals in mind. 
8. Identify review points, either on a calendar basis or when a structural event occurs, either within your account or the security’s own development. 

If you need help or disagree with this type of thinking contact me.


 
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/07/that-was-week-that-was-change-weekly.html

https://mikelipper.blogspot.com/2020/07/currently-selling-more-important-than.html

https://mikelipper.blogspot.com/2020/07/july-4th-lesson-need-to-hire-wise-not.html



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A. Michael Lipper, CFA
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“That Was the Week That Was” = Change - Weekly Blog # 638

Mike Lipper’s Monday Morning Musings

“That Was the Week That Was” = Change

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

Introduction
This week’s title is not for code breakers but refers to series television title that was the name of a comedy review from the early days of network television making fun of the strange things that happened during the week. In prior blogs I quoted Lenin regarding the slowness of most historical trends to develop, but that accelerate in just a few weeks. “Change” is a sudden disruption of past trends, which great investors anticipate. Good investors recognize changes early when underway, while average investors are trend followers and poor investors extrapolate trends far too long.

Week ended Thursday-July 16th 
The prior investment performance trends that had gone on for over a year were disrupted. (Based on experience, the most accurate performance data terminates on Thursdays, avoiding the rush to start weekends that begin on Friday afternoons for some. This is particularly true during the summer.) Past performance results were led globally by up to ten large tech-oriented companies, providing vital internet services to people who were “sheltering in place”. These companies were supported by up to forty important suppliers. The strong stock price performance of up to fifty companies gave the impression that our economies were in a “V” shaped recovery, if not the early stage of a bull market. If one looked at thousands of other companies, the lift off the pandemic bottom was more modest. The two tables below show a distinct change in performance leadership for US registered mutual funds in rising order of change for the week ended July 16th:

S&P 500 Index Funds    +2.02%

Large-Cap Value Funds  +4.89%  
Multi-Cap Value Funds  +5.42%  
Mid-Cap Value Funds    +6.58%  
Small-Cap Value Funds  +7.35%  

Large-Cap Growth Funds -0.70%
Multi-Cap Growth Funds -0.47%
Mid-Cap Growth Funds   +0.40%
Small-Cap Growth Funds +1.45%

This is the first week in memory that value funds not only beat growth funds, but meaningfully so. Also, I find it of interest that the size of the stock market capitalizations in fund portfolios impacted performance so markedly. The declining order of performance in the week may well be the cost of liquidity required by heavy traders.

The performance disruption of past trends also occurred in the performance of SEC registered, internationally invested mutual funds.

China Region Funds           -5.30%
Emerging Market Stock Funds  -2.20%
Latin American Funds         +0.30%
Japanese Funds               +1.44%
European Funds               +2.94%

Of the 25 best performing mutual funds this week, 16 were small caps and 13 were value focused funds. (Obviously, some good performers made both lists.) China Region Funds have been the leading geography to invest in for most of this year, while Europe has been going through a very long turnaround. As is typical of the future discounting attribute of stock prices, they are further along than economic reports. One should bear in mind that all numbers are based on translation into US dollars from local currencies. Thus, the presumed relative safety of US dollars could be impacting the above numbers. The S&P/Dow Jones Indices track 32 markets. In their latest report, 25 rose and seven declined, with one of the seven falling being US large growth.

Applying Change to Selections
While security holdings change very little in many fund portfolios, some constantly evolve. Those that make a limited number of changes believe that investors wish to own the kinds of securities they see in periodic reports. Others believe that their investors want the results of the following principles, which can lead to changes in both the weighting and names in their portfolio. Below is a list of tactical moves that one fund manager is applying as they react to the changes in perception of future developments.

Selling inputs (To generate cash for investment opportunities)

1. Selling into rising strength
2. Selling to normalize size of positions
3. Selling into poor M&A activity

Buying Inputs (Building future sources to meet needs)

1. Buying into declining prices
2. Starting new positions in the best companies in a troubled sector
3. Increasing market share of the stock that’s not already discounted
4. Buying into strong balance sheets, spending discipline, and free cash flow generations, even when current earnings disappoint
5. Expect rising oil and energy prices over next year or two, within a bear phase
6. Capacity cutbacks create opportunities that create trading opportunities

Any thoughts?


 
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/07/currently-selling-more-important-than.html

https://mikelipper.blogspot.com/2020/07/july-4th-lesson-need-to-hire-wise-not.html

https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html



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A. Michael Lipper, CFA
All rights reserved
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Currently, Selling More Important Than Buying - Weekly Blog # 637

Mike Lipper’s Monday Morning Musings

Currently, Selling More Important Than Buying

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

July is often a low volume, relatively quiet, stock market period.  August, with its different conventions, COVID-19 progress and short-term economic signals, will likely be more lively. This is therefore the ideal time to look at portfolios with two to one hundred plus securities. Include in your analysis both all the cash that could be invested and probable cash demands well into 2021. This review is unlike the usual process of buying some new and exciting investment, where you quickly find the money for your new “almost certain winner”. However, most of the time new purchases will not drive next year’s performance, it will be more impacted by the remaining portfolio.

Remember March
Many investors feared that the one-month dramatic fall in stock indices was the opening salvo of a long, protracted “bear market”. As usual with mass fears, it did not happen for political reasons. Yet, although there was still some of the normal cleansing effect of an economic recession, it was perhaps not enough.

Record 2nd Quarter Continuing
With governments and their junior partners, the central banks, induced a strong rally occurred led by speculative forces, including the not yet dead zombies that should have been liquidated. The NASDAQ Composite gained +30.6% in the quarter and continued through Friday with another record high, gaining +4.01% just last week. Globally, the big winners were two handfuls of large-cap technology-oriented stocks. Even with the increasing levels of tension with China, their stocks are the biggest winners as an investment region thus far in 2020. Last week, 16 out of the 25 best performing SEC registered mutual funds for the week were primarily invested in the China Region. (Even within China, the controlled press warned local investors to be careful with record prices and a wave of new IPOs.) In the US markets, 75% of the weekly prices for ETFs, stock market indices, currencies and commodities were higher. Translating all this bullishness into mutual fund performance for the funds we are particularly interested in, some had gains better than 50% from the March lows. One might suggest that some investors are experiencing a sugar or other stimulant high.

Outlooks
There are as usual a myriad of outlooks depending on both direction and varying time periods. While investors should sub-divide their portfolios into different time periods based on the expected needs for their capital, they do not. Unfortunately, most investors, particularly those competing for new money, are fixated on 2020 results. This is unfortunate because I hope the future does not contain many years similar to 2020.

Six Month Positives
The AAII, usually a reliable contrarian indicator, has now flashed four straight weeks where their sample survey of member market expectations for the next six months was over 40% bearish. This number is unusually strong both in magnitude and duration. While they could be correct this time, it would be surprising.

Longer-term Concerns
Citigroup has a model identifying periods of panic and euphoria designed to predict the stock market one year into the future. It is based on tracking extreme current market behavior that will lead to a reversal the following year. The current reading from this model points to lower stock prices a year from now resulting from the short-term euphoria we have been experiencing.

Barron’s publishes a weekly chart on the movement gold mining stock prices vs. bullion prices. Recently, the price of the metal has been rising gently while the index of mining stock prices has been rising sharply, suggesting buyers of mining shares expect materially higher prices in the future. Most mining companies are highly leveraged, with operating expenses, debt, and stiff taxes. Traditionally, when the price of gold goes up, most other stocks go down. Mario Gabelli, a well-known and respected investor, expects 2021 gross margins to decline.

Recently, there has been an increase in the number of people believing that there is a reasonable chance of a ”blue wave” coming in the election, with the Democratic-Socialists winning the Presidency and both houses of Congress. If that were to happen, many believe taxpayers and consumers would forfeit twice, both with taxes and inflation rising measurably. If the “blue wave” does not materialize, it is likely that only accelerating inflation will cause the squeeze on gross margins that Mario expects. Both party’s policies will lead to an increased cost of living. Under any of the feared circumstances, the long-awaited relative price performance of some value stocks will likely improve.

The Poor History of Escaping from Cash
In the last fifty years or so, we have seen attempts to escape expected sharp gains in inflation, leading to the liquidation of some assets like cash in order to invest in “real assets”. Remember when the Japanese bought high-priced golf courses around the world to escape their inflation. They paid premium prices for classic real estate, e.g. Rockefeller Center.

For perhaps twenty years, Chinese citizens and relatives of political people have been exporting their wealth to Western countries whenever they could.

In the West, the wealthy have bid up popular pieces of art to ever higher prices. Many financial writers scoffed at the high prices paid for these foolish purchases, not recognizing that the buyers were actually selling an over-priced currency held in surplus. Perhaps this is what is in the mind of the current “goldbugs”?

My guess in all these cases, even measuring at their lower exit prices, the exporters will come out ahead of those that stayed completely in their own currency.

What to do?

1. Make a list of your current assets and resources net of obligations. Put the list in descending order as a percentage of wealth.
2. Pay particular attention to the top half of the wealth pile and ask if you would choose to have that much of your wealth so exposed today.
3. Staying with the top 50% of the list, what could negatively impact its value. Separate the list into general calamities and specific problems, e.g. labor problems combined with unfavorable governments.
4. Determine whether there are hedging or opposite vehicles for each specific risk, as well as more general risks. Energy and airlines are opposite vehicles.
5. View the costs of hedging or contrary investments as an insurance premium, much like what you might pay to fully insure your home or jewels.
6. Rearrange your assets with the potential gains and losses, including the theoretical insurance premiums. 
7. Repeat once a year.

Please share your thoughts with me on the subjects and approaches mentioned.

 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/07/july-4th-lesson-need-to-hire-wise-not.html

https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html



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Copyright © 2008 - 2018

A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.

July 4th Lesson: Need to Hire Wise, not Just Smart People - Weekly Blog # 636

Mike Lipper’s Monday Morning Musings

July 4th Lesson: Need to Hire Wise, not Just Smart People

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

Bear in mind, many smart people are taught lots of valuable lessons in schools and search for answers that look like test questions in terms of simple (straight line) answers. Wise people are educated through their own experiences and the experiences of others. This is the main reason many smart people do not achieve lasting success in various activities, including investing.

Current Dilemma 
Almost the entire globe is being worn down by the Coronavirus plague. We will probably only exit the current economic and political conditions and enter the “New Normal” when either effective medical treatments or vaccines are in large supply. This is a smart, but not a wise view based on history. The fatality rate currently reported (including the estimate of undiagnosed Covid-19 cases) is undeniably tragic, but is low compared to historic experiences.  Conversely, public reaction has been unprecedented in size and scope.

What are the differences causing all this turmoil? 

1. The rampant fear of the unknown and the uncertainty of the depth and duration of the impact of the pandemic.
2. The stress of the “lockdowns” caused by the shrinking of the economy and changing political conditions.
3. The speed at which it has happened and its continued acceleration. 

In the desperate search for a “New Normal”, people do not remember a quote attributed to Lenin “There are decades where nothing happens; and there are weeks where decades happen.” The revolutions Lenin instigated may have impacted more than half the world at one point.

American Revolution
This blog is being written on the day after the US celebration of July 4th, Declaration of Independence. I believe this 18th century revolution, supported by a fraction of those living in the country at the time, is still impacting the world to an extent even bigger extent than Lenin’s efforts. To a large degree the American Revolution began the New Normal for most of the world. While it is still evolving, a new normal may be entering the globe, potentially impacting commerce and consequently the political sphere. Thus, it makes some sense to grasp how much time it took to complete the first phase of its new normal.

The Boston Massacre and Boston Tea Party were the first skirmishes in 1773. These were reactions to perceived unsuitable taxes and were followed by the first Continental Congress in 1774, leading to a somewhat unpopular war which ended with very appropriate march music by the surrendering British soldiers “The World Turned Upside Down”. The real revolution came to the political sphere in 1781 when the Articles of Confederation were passed, giving an unsatisfying structure to the 13 independent states. To address its deficiencies and to create a central government, the US Constitution was passed in 1788. Perhaps, more important in today’s environment is the  Bill of Rights, passed in 1791. The first major test of the American experiment came in 1797 when George Washington’s second term ended in the peaceful succession to Massachusetts lawyer, John Adams. (George III, and many elsewhere in Europe predicted Washington would be crowned King, or would be replaced by a “strongman”. Similar to what has happened recently in Russia, China, and parts of Africa.)

Thus, the functioning “New Normal” took 24 years before it was viewed as secure and essentially lasted until the Civil War broke out. Most current history written about the Civil War lists slavery as being the cause of the War. This was the same issue that occupied much of the wrangling by the members of Congress in producing both the Declaration of Independence and the US Constitution. In both cases the Members concluded that they could not agree on perfect documents and accepted a compromise. What really broke the impasse was economics in the form of import tariffs, something generally not credited and one of many failures to teach accurate history.

The main source of tax revenue for the US Government until the 20th Century, excluding the federal income tax during the Civil War, was money from tariffs. These were quite favorably supported in the North, as they gave price protection to Northern manufactured goods. Those in the South saw tariffs as hurting the export of their cash crop, cotton. The southerners were already being squeezed by the declining economics of slavery. As is often the case when economics is important, it is hidden under more acceptable social causes.

Translating to Our Search for a New Normal

1. I believe the various medical solutions for COVID-19 and its aftermath will take longer than expected to reach a reasonably affordable conclusion. 
2. The trend to work at home will evolve, but we will not see the same number of people working every day in large offices.
3. There will be continued growth in shopping over the internet.
4. Education will increasingly be delivered over the internet, with some necessary exceptions. Furthermore, schooling will be focused on current and particularly future employment needs.
5. The military will be focused on a combination of raids and electronic warfare.
6. Supply chains will be rationalized, both for security and economic advantages.
7. Travel will be streamlined and made medically safer.
8. Politics will revert to the former House Speaker Tip O’Neill’s view, that all politics is local.
9. We will live longer and more expensively.
10. My strongest view of all is that I will both be wrong and surprised.

What to Do?
What is taught in most business, finance, management, and economics classes, success is based on formulated planning. I have been both a reasonably successful private company entrepreneur and an investor in competitive fields. It is my belief that success is based on finding the right people and having them evolve in the right jobs.

In terms of picking successful funds to invest in over long periods of time, the skills and culture of management has been crucial to the result. One of the better ways to guess whether management will make the profitable decision is to look at how they handle the myriad of short-term details that surround any activity. Most companies have reasonably good management in particular portions of their business; however, going beyond the borders of that expertise adds to risk without the addition of new talent.

As fund investors we are believers in well-diversified portfolios of concentrated funds, when they can be found. When they cannot be found we invest in low cost broadly invested portfolios.

Where are We Now?
Short-term, until at least the election or longer if there are meaningful changes. One should recognize that in terms of stocks and stock funds the attention of the market has become more speculative, as shown below:

1. In the first half of 2020, mostly in the second quarter, there have been 64 IPOs on the NASDAQ raising $19.11 billion and 33 on the NYSE raising $15.44 billion.
2. While both the DJIA and S&P 500 are still below their former highs, the NASDAQ Composite has gained +13.76% year to date, including dividends.
3. Precious Metals funds for the first half are up +21.76%, Global Tech funds +19.74%, Tech funds +15.56%, and Large-Cap Growth funds +11.92%. There are 21 peer groups positive for the year.
4. As a contrarian indicator, this last week was the third week in a row that the AAII sample survey had a bearish reading over 40%.

Fixed Income Funds

1. Europeans expect mid-term inflation.
2. Mortgage applications are at their highest level since 2008.
3. The default rate for speculative issues is 12.5%. Credit defaults are expected to rise in a prolonged recession.
4. The Big Fear – a trifecta of Democratic victories. Based on history it is unlikely. If it happens, except in the case of the current administration, when has a politician delivered on campaign promises?

Conclusion
Long-term investors should maintain equity holdings and look to add selectively overseas. Shorten up durations on fixed income.

 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings-new.html

https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html



Did someone forward you this blog? 
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2018

A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.