What Did Friday’s Market & Political Actions Mean for Investments? - Weekly Blog # 687

 

Mike Lipper’s Monday Morning Musings

What Did Friday’s Market & Political Actions Mean for Investments?

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

(One of the challenges of living in the present is evaluating what has just happened, related to both history and expected futures. The following blog briefly examines four alternative sets of actions related to Friday’s events.)

Friday’s Actions

• Compared to a relatively low volume period for last two months, the New York Stock Exchange volume shot up 7.6 million shares from Thursday’s 3.9 million. Somewhat higher volume was generated on the NASDAQ, 7.8 vs 4.3 million shares. Interestingly, the Barron’s Confidence Index, which uses bond yields, shot up meaningfully in favor of high-quality bonds vs. intermediate bonds. For those who believe bonds often move before stocks, an increase in interest for high quality bonds is negative for future stock performance.
• The impetus for sharply rising stock prices in the morning was the announcement of a bill on infrastructure extensively negotiated by 21 Senators. The Senators were joined on the White House driveway by President Biden, who agreed without reservation to the proposed bill.
• Within two hours there was an announcement (from the 3rd term Obama staff) that the President would only sign the infrastructure bill after reconciliation actions coincident with the passing of his social programs. 
• This brought an immediate reaction by a number of Republican Senators who were part of the 21 member negotiations group. There were additional rumblings from a few Democratic Senators. Not surprising, price gains of Friday morning shrank.
• After the market close the White House issued the following statement from The President, “My comments also created the impression that I was issuing a veto threat on the very plan I had agreed to, which was certainly not my intent.”

What Should Investors Ponder?

1. Who is running The Executive Branch? Is it the President? Or is it the third-term Obama staff with their second-term FDR model?
2. Is redistribution of political contributions inevitable?
3. Pundits and their followers pay too much attention to political news.
4. Short-term market fluctuations do not determine long-term wealth opportunities.

Each Investment Portfolio Should be Managed to Fulfill it’s Needs

With that thought in mind the following tactical considerations should be considered.

1. We live in a global world. Increasingly, many of the goods and services believed to be vital are influenced by both attempts to restructure the domestic economy and actions taking place beyond our borders . Historically, people of wealth have diversified by investing outside the purview of their home governments. For the most part Americans have been a bit late in this effort. Our first conscious international exposure was often through buying shares in US-traded multi-national companies. In many ways this is a “half-pregnant” move. We are a believer that all investors should have some exposure to markets priced in currencies other than the US dollar. The needs of politicians are different than those of investors. Thus, the actions of selected foreign governments may be more favorable to investors than the those in the US and some of its states. This may be a particularly wise time to add individual foreign stocks and mutual funds investing internationally.
2. For shorter-term portfolios, considering the political uncertainty we are experiencing it may be wise to adapt trading technics, distinct from buy and hold investing approaches.
3. While the financial headlines are very short-term oriented, this may be the time to invest using fundamental terms. Dollar cost averaging could make a lot of sense.
4. For those able to meet liquidity needs with a portion of their portfolio, investing in selected private investments could make sense during a period likely to see increased investment regulation.

Please share your views on what has been expressed.

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https://mikelipper.blogspot.com/2021/06/to-benefit-long-term-investors-invert.html

https://mikelipper.blogspot.com/2021/06/history-good-lessons-not-great.html

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50% Humility & Search for New Money Standard - Weekly Blog # 686

 

Mike Lipper’s Monday Morning Musings

50% Humility & Search for New Money Standard

(Caution: Few may totally agree, but all should view as possible)

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

Top- Down Week:

Two messages from Washington this week; humility and arrogance. This week, the Chair of the Federal Reserve Board in effect recognized the need to show humility. Faced with the COVID-19 Pandemic and excessive lockdowns, the Fed recognized its all-important research/prediction process was significantly inaccurate in judging the economy and inflation. To me, this recognition is much more important than the “Dot Plots” prediction of two rate increases in 2023. As an investor/portfolio manager/analyst and handicapper, I believe “two in ’23 is a bad bet, partially due to the actions and attitudes emanating from The White House. 

There is the just doing the opposite attitude by the current repeat tenants of The White House. In terms of improving relations with China, the stated purpose of the meeting in Alaska, US Foreign Policy was a failure. The same game plan was used in the meetings with the G-7, NATO, and President Putin. The goal of all was to influence the domestic consumption of post meeting press conferences, not to conduct any substantive negotiations. Since the beginning of meetings between adversaries, successful meetings were generally held in private. At these meetings, disagreements between parties were often worked out and largely settled, with the participants being critical contributors in the negotiations, not props for press releases. 

Connected to the discussion with Russian President was a set of clues that would perhaps benefit the Russian economy. By further increasing the price of oil the occupants of The White House are, or are planning to, reduce the production of US energy. This may be why they turned down a critical way to pay for part of the proposed infrastructure bill by indexing the federal gasoline tax. Seems a strange way to address the exploding inflation issue.

Reactions: 

As few if any buyers or sellers offer affidavits as to why they have bought or sold a security, we don’t really know the real cause of transactions. The best we can do is use circumstantial evidence and we have learned how wrong conclusions from such evidence can be. The following is a list of reactions, from the simplest and most current to historical and future generational extrapolations.

1. The traditional slowdown in trading, particularly on Fridays, with summer apparently starting earlier this year.
2. Individual investors and inexperienced wealth managers have focused on the Dow Jones Industrial Average fall of -3.45%, compared to the smaller decline of -1.91% for the more institutionally oriented investment focused S&P 500. The savviest traders who predominate the NASDAQ only experienced a fall of -0.28%, suggesting the DJIA decline was driven by disappointing reactions to media pundits press conferences. This was particularly true on Friday as traders unloaded their positions they did not want to carry over the weekend. Friday's downside relative to upside volume on the NYSE was six times greater than the 2.5 times on the NASDAQ.
3. There were relatively few price gainers for the week, most being tech-oriented growth stocks, with particular focus on internet related firms. These gains were generated in spite of largely Democratic members of Congress calling for the breakup of the large tech companies. Based on history, many smaller companies and users of tech would suffer, potentially causing a switch to growth from value/industrial companies where valuations are one half or less. Value stocks have been performing better than growth for a while. Is it possible that the aggregate market demand switch is saying that growth will produce higher returns than value over the long-term? One could take that point of view based on the expected future actions of politicians and the "Fed". The weekend roster of weekly prices across many sectors showed 86% going down.
4. Some may be seeing the probability of more expensive energy retarding global growth.
5. The rising interest in actual and synthetic gold reflects concerns related to the value of currency. The "gold standard" worked for thousands of years, although that was in a world where physical assets were the primary measure of wealth. The private sector holds gold as a hedge against the historic tendency of governments to reduce the amount of gold backing money. Today, most currencies are not significantly backed by gold or hard tradeable assets. These fiat currencies are increasingly issued by autocratic governments with substantial debts who benefit from inflation. Governments with substantial debts benefit from inflation increasing taxes and reducing the "real costs" of repayment. We have experienced governments attempting to deny ownership of gold in the private sector. Those who own actual or synthetic gold expect the prices of their assets to go up and become the real backing for the currency. I question that we have entered a world where we pay considerably more for services than hard assets. At some point I suspect bundles of service contracts will be the backing for our currencies. These include medical contracts, protection contracts, travel contracts, use of location contracts (homes and facilities) and others including military contacts. (Remember, the American Revolution had European mercenaries. The current administration is removing ours in the Middle East and wants higher compensation for our forces in Europe and Korea.) We are closer than we realize to a service-contract oriented wealth system.

We congratulate all the fathers for their good choices who spent time with their children, grandchildren, great grandchildren, and other relatives on Sunday.

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

https://mikelipper.blogspot.com/2021/06/to-benefit-long-term-investors-invert.html

https://mikelipper.blogspot.com/2021/06/history-good-lessons-not-great.html

https://mikelipper.blogspot.com/2021/05/mike-lippers-monday-morning-musings_30.html

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To Benefit Long Term Investors: Invert Punditry - Weekly Blog # 685

 

Mike Lipper’s Monday Morning Musings

To Benefit Long Term Investors: Invert Punditry

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

Pay Attention to Word Count

Notice the number of words one is besieged with by the media concerning the current economy and market. Investment marketers take their cues from the media to pitch their wares, aggrandizing their pitches to focus favorably on easy markets. These marketers convince the “corner office” that expensive marketing efforts, focused on the relatively short periods used by pundits, reward portfolio managers and other investment staff. Would you believe that the investment efforts would be directed toward managing portfolios to achieve good results in the time periods favored by the pundits? 

One indication of the market power of pundit soundbites is the weekly sample survey conducted by the American Association of Individual Investors (AAII). They ask their weekly sample if they have a bullish, bearish, or neutral market performance outlook over the next six months and most of the time their views represent those of the loudest pundits. Professional market analysts consider the trend of their predictions a contrary indicator, like odd-lot transactions at turning points used in the past. Statistically, they are extrapolations of current trends, or what politicians call “the big Mo”, or momentum. Only half the number are bearish vs. bullish in this week’s reading, which probably tracks the word count published by pundits. This extreme ratio, or higher, is often found at significant turning points.  

Focusing on this week’s information I examined the amount of attention pundits paid to these factors, as well as the lessons learned. (Lessons learned are in parentheses.) The purpose of this exercise is to suggest our subscribers do a somewhat similar exercise using personal inputs and lessons, perhaps sharing them with this group.

Current Inputs

On Friday, Moody’s reached a record high price of 19 times its original cost in our private financial services fund. (To offset the fixed income cycle Moody’s is successfully developing other products and services, both organically and through careful global acquisitions. These are being recognized by the market.)

More than half of net flows into mutual funds and ETFs are going into money market funds. In May, $19 Billion went into these funds paying low interest rates, while Tech sector funds experienced net outflows of $5.8 billion. (Investors are choosing to invest in cash, accepting the twin risks of inflation and a two-month decline of -2.4% in the value of the US dollar in April and May.) The decline in ten-year US Treasuries yields is primarily due to foreign buyers seeking to take advantage of relatively high US yields, even after currency hedges.

Longer Term Views of Top Fund Managers

Two of the largest mutual fund management companies serving both individual and institutional investors, Capital Group (American Funds) and T. Rowe Price, recently sent reports to investors and distributors urging them to hold through the coming market decline. The historic bases of these groups are slightly different, American Funds being historically focused on their growth & income load funds and T. Rowe Price their no-load growth funds. Both have sound records and now offer domestic and international vehicles to a global marketplace. 

Summarizing their well written views:

Capital Group emphasizes the cyclicality of the market and the danger of jumping out during a decline. They demonstrate the negative impact on long-term performance resulting from being out of the market on the ten worst days during major declines. Most periods of decline are short relative to those of rising markets. (The one exception, using my words, “the second FDR depression”, immediately followed the prior depression, March 6, 1937, to April 28, 1942. This is important to me, as the Biden or third Obama term looks to FDR as a model. They could be right.)

T. Rowe Price lists the following concerns: nearing peak economic levels, rising inflation, higher taxes, central bank mistakes, and increasing geopolitical concerns. Perhaps the one distinguishing difference between the two firms is T. Rowe Price having public shareholders, including us. Consequently, they may be more sensitive to investor sentiment trends.

One risk that should be added to the worry list is the current younger generation of leveraged traders losing a lot of money, which seems inevitable. It will give politicians an opportunity to impose more draconian regulations, which will likely raise the costs of investing and reduce opportunities, for a while.

Our Own Holdings

As a student of successful wealthy families in numerous countries, I have been impressed by the concentration of wealth in a relatively small number of long-term investments. To an important degree, these traits have been my personal model as well. The success of this strategy comes from the appreciating long-term holdings becoming a larger portion of the total portfolio, more than offsetting the inevitable losers. The following is a brief discussion of four significant winners and why I acquired them. 

1. S&P Global, formerly McGraw Hill, was purchased in 1977 because I did not wish to be embarrassed. (At the time I was the chairman of the program committee of the New York Society of Securities Analyst. I was blessed with having a strong committee, one of whom was the leading analysts covering McGraw Hill, which appeared to be too complex. Our solution was for the first time to devote one full day to one company, going through each of their major parts. I didn’t know the company and was concerned that I would embarrass the NYSSA and myself by asking a dumb question, so I bought a few shares of the stock. Luckily for all concerned the meeting was a success and lucky for me I continue to hold those shares, which have produced a return of 35,810%. The lessons from this are, do the right thing for your perceived responsibilities to others and it is good to be lucky.)
2. Another example of being fortunate happened when I purchased a few shares in an innovative closed-end fund. It was one of the very first funds, managed by Eaton Vance, to own private equities along with publicly traded stocks. The private equities were selected by the venture capital group of the Rockefeller family. For regulatory purposes it was later determined that these investments were inappropriate for a closed end fund due to the difficulty in ascertaining current values. Consequently, the partnership with the venture group was dissolved and the fund holders were paid in kind. That was how I had happened to get a few very cheap shares in Apple. By late 1999 I realized the potential of Apple and consciously bought more shares. The combined Apple holdings have gained 21,735 % over cost. (The lesson being, when things happen study the opportunity.)
3. Not all my long-term holdings started with luck, some actually showed analytical skill or the recognition of missing skills. In 1985 my investments were quite limited, as all my time was spent developing Lipper Analytical Services into what became a premier institutional global analytical firm producing analyses on the fund business. Nevertheless, I was conscious of a need to build an investment portfolio. That was when I bought a few shares in Berkshire Hathaway. (The critical lessons that drove this purchase were a recognition that casualty insurance, particularly reinsurance, was difficult to understand and buying holding companies was a separate skill set. Based on this self-analyses it was not difficult to select the right investment, Berkshire Hathaway. The gains from that purchase are 28,393%. Charlie Munger and Warren Buffett’s skills have been extraordinary.)
4. The final successful long-term investment, bought in 1987, is now the stock of Morgan Stanley. The original purchase was Eaton Vance, the innovative fund management company previously mentioned. I believed that as a peddler to my fund clients I should be able to see the world through their eyes. For an old Boston based investment counsel firm they were involved with originating innovative products and services. For many years this trait produced good results but it has not done so recently. Because my original reason for buying the stock was to see the world as my clients do, I was not surprised that they sold out at a good price to Morgan Stanley. From the original purchase the appreciation has been 2,247%. (The critical lesson is, to leave the battlefield successfully we must recognize when the game has evolved from one in which we have superior skills to a new one that we are less equipped to win.)

Two More History Lessons

Ben Franklin left $2,000 in his will to help young tradesmen in the cities of Boston and Philadelphia. For 200 years only the income could be spent. By 1990 the balance after expenditures for scholarships, women’s health, help for firefighters and disabled children had grown to $6.5 million. In many ways Ben Franklin was the smartest of our Founding Fathers. (Two critical lessons: the power of compound interest and delaying the spending of principal as long as possible.)

In looking at the share of the world’s GDP from 1500 to the present time there are only two countries that approach 40% of the total, China and the US. China peaked around 1820 and the US around 1950. China is growing again, but the US is not.  WE SHOULD NOT IGNORE THIS, particularly in terms of education and discipline. 

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

https://mikelipper.blogspot.com/2021/06/history-good-lessons-not-great.html

https://mikelipper.blogspot.com/2021/05/mike-lippers-monday-morning-musings_30.html

https://mikelipper.blogspot.com/2021/05/faulty-comparisons-weekly-blog-682.html

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History: Good Lessons & Not Great Predictors - Weekly Blog # 684

 

Mike Lipper’s Monday Morning Musings

History: Good Lessons & Not Great Predictors

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

Human Minds

We are all wagering machines. When we wake up day or night we make a bet, most of the time extrapolating the current trend. We remain on this journey and deviate based on internally accepted historic lessons, modified by predictions of change. Pundits, or so-called teachers, are often the sources of these perceived historic lessons. In the few minutes they have our distracted attention they simplify what initiated the change. These summaries are rarely subjected to evidentiary rules and opposing views, or the mood of the times.  

An example of how the viewing of financial data has evolved from my college days is evident in this weekend’s Bloomberg interview with Josh Friedman, Co-CEO of Canyon Partners, a very successful institutional manager of credit portfolios. He is a fellow trustee of Caltech and former Chair of its Investment Committee. His cogent analysis of the investment market suggests that much of what is happening relates to the sale of assets, not earnings, with institutional prices the result of carried interest/performance fees. The skill sets at Josh’s firm include asset accounting.

In the late 1950s, as an undergraduate taking graduate courses, I had the great honor of taking Securities Analysis under Professor David Dodd. He was the principal writer of the textbook with Benjamin Graham (Graham & Dodd). Showing more guts than brains, I questioned his focus on the proper valuation of assets and liabilities, considering his data started shortly after the trough of the Depression, when the first edition of the textbook was published. I felt it was outmoded in a world that was paying for earnings, particularly earnings growth. Smiling, he divulged how much money an investment in his fund had made by investing in assets selling at a discount. 

Columbia offered two courses in the second year of accounting. Cost accounting, popular with aspiring accountants, and asset accounting, tied to the Graham & Dodd investment practice. Asset accounting, unlike cost accounting, did not focus on the historic cost of assets and liabilities and created a much different valuation, similar to what Canyon Partners practices today. Perhaps the most valuable lesson from that course was the final exam, where 50% of the score was devoted to the critical aspects of a business not captured by the accounting statements.

Both the late David Dodd and I were right. In the 1960s and some of the 1970s, stocks with earnings and earnings growth were the standout investments. Later during that period, Mike Milken spotted Keystone custodian funds having a junk bond fund with significantly superior performance to its stablemate, a high-quality corporate bond fund. Milken, through Drexel Burnham (*), began a very successful sales campaign to sell high-yield or junk bonds to insurance companies and savings institutions. It was so successful that there was soon a shortage of paper to fill high-yield demand during this period of low interest rates. Much later, rising interest rates cratered the market price for “junk” bonds, brought on by increased regulatory pressure and Volcker attacking inflationary pressures. At much lower prices, another era of asset accounting value surfaced.

(*) I was a junior analyst at Burnham in the mid-1960s, still chasing earnings.

Cycle Repeats, Lessons Should Have Been Learned

During the early part of the first Obama term, they created stimulus programs to give cash to consumers, hoping their increased spending would influence the mid-term election. However, a good bit of the money was saved or used to pay off debts, reducing the economic lift. With some of the same people in the White House today as in 2009, they should have learned that excess stimulus will create inflation in the years to come, as recovery from the lockdowns creates expansion.

Lesson of Lessons

Each lesson should be adjusted for historical perspective and given a different weight under different conditions. You should also consider when a particular strategy or tactic won’t work. It is also useful to evaluate what else is happening at the time and consider its influence on the result or the value of the result. Although pundits try to deliver a forceful simple statement that immediately solves problems, life is rarely binary. We need to accept that we are complex people living in a complex world.

Predictability

One reason all investors should pay attention to mutual funds is they reveal what individuals and institutions are doing or not doing. Before delving into fund performance statistics, a few general comments might be useful:

• The main use of mutual funds is to meet retirement or legacy needs.
• Funds, even no-loads, are sold with involvement of an intermediary.
• As long-term investments they are rarely disrupted.
• Most redemptions are completions or reflect changes of needs.
• The former commission broker is now a wealth manager getting an annual advisory fee, making an ETF the likely choice.
• Fund owners have other financial assets.
• Salary savings - 401k, 457, and 403 are pension replacements.
• Funds are being used by a growing number of institutions.

At least weekly, if not daily, I examine fund performance. From an investment policy standpoint, I pay particular attention to two mega collections of funds encompassing most of the equity assets of mutual funds. There are 18 peer groups of US Diversified Equity Funds (USDEF) and 13 Sector Equity Funds. (At times I pay attention to global, international, commodity, and mixed asset funds as well.) After the end of each month, I look at a report that portrays total return performance for 8 periods, from one week to ten years. One screen I use for some accounts is to see which investment objective peer groups perform better than the average of all S&P 500 Index Funds. The analysis to the end of May shows two important elements.

1. For the year-to-date period, 10 of 18 USDEF and 8 of 18 Sector Groups beat the S&P 500 Index Funds’ average. This is unusual because index funds have lower fees, less turnover, and less cash. This is a trend that has been happening since the bottom of the market and may not last a long-time.
2. Contrasting the YTD figures with 10-year performance, one can see the difficulty in beating “the market”. Only 3 of the 18 US Diversified Fund Groups and 4 of 13 Sector Fund Groups beat the S&P 500 Index Funds’ averages.

What was the frequency of various peer group averages beating the market during the 8 periods? Small-Cap Value, Multi-Cap Growth, and Tech Funds each did it 5 times. Large-Cap Growth and Natural Resources did it 4 times.

This suggests that superior investment selection is difficult and possibly should not be an appropriate goal. A subject for a later blog. For those that are interested, I recommend two articles in the Saturday Financial Times on selection difficulties. They are titled “Racing Industry Looks to Epson Derby for Galileo Heir” and “Tiger Cubs on Prowl after Robertson built dynasty in hedge fund jungle”.

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We are delighted to have a significant number of new subscribers joining us and would like to get to know you and your investment views/problems. Any time you have a suggestion as how we can be of greater service to you and others, please let us know. 

W E L C O M E  A B O A R D

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

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https://mikelipper.blogspot.com/2021/05/faulty-comparisons-weekly-blog-682.html

https://mikelipper.blogspot.com/2021/05/extreme-views-can-be-good-lessons.html

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All rights reserved.

Contact author for limited redistribution permission.