Weather, Market, Economic, and Political Forecasts have Similar Records - Weekly Blog # 744

 

 

 

Mike Lipper’s Monday Morning Musings

 

Weather, Market, Economic, and

Political Forecasts have Similar Records

 

 

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

    

 

 

Caution:

“Bears are the worst people to listen to at the lows, and bulls are the worst to listen to at the highs.” Bank of America Merrill.

 

Are you Optimistic?

For a number crunching experienced analyst it is much easier to be excessively skeptical than believing things will work out well. Please suggest ways I can be more optimistic in the future, as it has been too easy to be pessimistic for more than a year.

 

Two Big Stories of the Week

Far too much has been said or written about the Federal Reserve raising interest rates by 75 basis points and the Senate’s compromise tax bill. Analytically, all I wish to add are thoughts not discussed elsewhere.

 

In all the discussion of interest rates related to both inflation and recessions, two long-term critically important areas are not explored.

 

Most of the discussion has been focused on the size of the increase and its timing. More important is the historical need for recessions (Some of which were turned into depressions due to policy mistakes.)

 

Throughout recorded economic history there have been severe economic/market disruptions caused by known and unidentified imbalances not properly addressed in normal circumstances.

 

The present imbalances I perceive as not being addressed can be characterized by the lack of sufficient efficiency to produce satisfactory results, some of which are briefly shown below:

 

·    In the US there are roughly twice as many openings as there are unemployed, with 5% fewer participants in the work force. Among other factors this is the combined result of poor schooling and home training, plus unaffordable child-care.

 

·   Prospective employers can’t find workers. This is not just the result of insufficient formal “education”, but also work attitudes.

 

·   One example is healthcare, due to regulation resulting from tort lawyers and insurance payers. Unions also don’t help. We all pay for this.

 

·   Another example is the lack of an adequate Military force to defend our interests.

 

·   The final topic not discussed in the rate discussion, particularly when mentioning Paul Volcker’s name, is that he needed two recessions to break the back of inflation.

 

Turning to the new Tax bill, which in theory “balances” expenditures with tax collections. There is a classic problem of government paid workers versus some of the best highly paid tax accountants and lawyers in the world.

 

Dynamic forecasting is one reason weather, stock, economic, and political forecasters have difficulty on being correct in their judgements twice in a row. (Track bettors know how difficult it is to follow a winning bet with another winning bet in the next race.)

 

Luckily it did happen in World War II, when General Dwight Eisenhauer was given command of the largest amphibious landing in the history of the world. At the scheduled time of the main European landing the weather was poor. The German general’s staff of highly trained logisticians believed Ike would postpone the landing to later in the month of June. However, they did not take into consideration that Ike grew up on a farm in Kansas and spent many years as General Mac Arthur’s speechwriter in the Philippines, both of which experience sudden storms. Ike made the judgment to go ahead with the June 6^th landing. Although there were some difficulties, it established the Americans, British, and other Allies on the beaches before the Germans could reinforce their defenses. This proves that making a bet against the odds can win sometimes.

 

What Else Happened?

This week the New York Stock Exchange (NYSE) volume of up price transactions was approximately the same as those on the NASDAQ market, at 13 million shares. The big difference was the number of shares changing hands at lower prices, with the NYSE having 7.1 million and the NASDAQ 9.4 million. (As mentioned in these blogs, the NASDAQ players tend to be wiser traders, due to the absence of index players and to some extent wealth managers.) This could be viewed as a cautionary note.

 

Also, 95% of the stocks in the Dow Jones Transportation Index rose, while only 80% of the stocks in the DJIA rose this week. Typically, more professionals invest in transportation securities than the more popular industrials in the DJIA. This is perhaps a contrary positive indicator.

 

Remember:

 I want to learn why you are Optimistic.

 

 

 

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

https://mikelipper.blogspot.com/2022/07/beware-of-cheap-seek-fair-slowly-weekly.html

 

https://mikelipper.blogspot.com/2022/07/time-to-be-contrary-weekly-blog-741.html

 

https://mikelipper.blogspot.com/2022/07/mike-lippers-monday-morning-musings.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 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

  

 

Beware of Cheap, Seek Fair Slowly - Weekly Blog # 743

 

Mike Lipper’s Monday Morning Musings

 

Beware of Cheap, Seek Fair Slowly

 

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

    

Current Conditions

This coming week we will get the Federal Reserve’s view of the appropriate level of interest rates. Much of the focus will be on the interest rate number. Far less attention paid to the cause of the action. Without understanding the causes, it is difficult to comprehend whether the resultant rates and other measures are going to have the desired result.

 

Not discussed is what I am labeling the “Politicians’ Put”. Where politicians avoid responsibility for causing harm to people’s income, jobs, and capital by making the Fed and Administrative State Commissioners responsible. There is precious little evidence that the Fed and various commissioners have any skills at predicting the future or recommending wise actions.

 

Part of the fallacy in relying on these individuals is that they tend to depend on numbers questionably put together. Too little attention is paid to the weekly local Reserve Bank presidents’ lunches with businesspeople and consumers. Some Presidents are better at asking follow-up questions than others.

 

I have seen the coming of the recession since last autumn. My source of information was walking various malls, talking with competent people unable to find jobs, and employers failing to find applicants possessing the right attitudes. In many cases, the supply shortages were due to a lack of front-line labor and supervisors.

 

The following data is mixed in terms of future implications:

·      An inverted yield curve with the ten-year rate at 2.78% vs the two-year rate of 2.99%

·      The JOC-ECRI Industrial Price Index falling -9.5% vs last year

·      The Labor Force Participation Rate falling -5% vs 2000

 

Start Buying?

The sign a bottom price has been reached is often a surge in transaction volume, signifying massive capitulation. “While everyone is talking bearish, no one selling is being heard”. Stock transaction volume is mild, although bond transaction volume may signify capitulation.

 

In the weekend Wall Street Journal (WSJ) there is a headline titled “Business Activity Declined Sharply”. In addition, showing the US and Global purchasing managers index dropping to 47.5 from the prior week’s 52.3, clearly showing a contraction.

 

After a significant decline there is a burning question in the heart of every investor about when one should begin buying stocks? The question pivots not on timing, but price.

 

I have had the extreme pleasure and honor of knowing great investors over 60 years. The first is Charlie Munger, who taught Warren Buffett that it is better to buy a great company at a fair price than a good company at a cheap price. His belief is that a great company gets better over time, whereas a cheap price only goes up for a period.

 

Before John Neff created a great record with Windsor and Gemini funds. He worked at a midwestern bank where they evaluated corporate loan applicants based on their average earnings power over five years. He applied this process to stock selection at Wellington Management for Vanguard funds, which helped his winning funds during bear markets.

 

One must be very careful applying the lessons of these two investor giants today. Some pundits are currently recommending so-called fallen angels. These are good or possibly great companies currently trading at depressed or “cheap” valuations. Current prices compared to last year’s earnings, or the last period of rising earnings is not particularly relevant. Particularly if we are in a recession that extends beyond a year. It is quite possible with future depressed earnings and today’s prices some stocks may be selling at record high valuations.

 

Depressed Earnings

There are two main causes for depressed earnings.

• A fall in demand for their products or services. As demand is a function of people’s attitudes, demand tends to fluctuate fast and cyclically.

• Companies investing substantial resources in future products and services will materially leverage current sales and earnings if successful.

I am following a few financial services companies in the second group. Their earnings are being penalized substantially more than their peers who have only cyclically depressed results in this downturn. My job as an analyst/investor is to attempt to select a company becoming a greater company, by accepting a bigger stock price decline than peers. This approach could lead to a different roster of candidates than held presently.

 

To some degree the relative size of a price decline is related to the nature of their shareholder base. That is why I tend to favor institutional quality companies, where a substantial portion of shares are owned by those relying on their own experienced internal analysts.

 

Question:  Have you changed your way of selecting securities due to the changing structure of the market.

 

 

 

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

https://mikelipper.blogspot.com/2022/07/time-to-be-contrary-weekly-blog-741.html

 

https://mikelipper.blogspot.com/2022/07/mike-lippers-monday-morning-musings.html

 

https://mikelipper.blogspot.com/2022/06/switching-prime-focus-weekly-blog-739.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 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

Short or Long? - Weekly Blog # 742

 

 

Mike Lipper’s Monday Morning Musings

 

Short or Long?

 

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

    

 

             

A short or long recession appears to be the critical question on most economically oriented people’s minds. As is often the case with a popular question, it is the easy but wrong question. The right question is, what impact will the soon to be declared recession have on our future economy, society, and investments?

 

Historians typically find an over-riding cause for the period between expansions. The declines that have the greatest impact on future expansions are not primarily to reset price levels but to address economic imbalances in society and focus on the critical forces shaping the future.

 

When most people discuss the future, they focus on the factors producing a result pleasing to them. Currently, the popular view is that the recession will be short and shallow. Well, it might be, but it’s appropriate for thinking people to consider at least two major outcomes, and others.

I have no special competence to divine the future but feel compelled to think about the alternatives for our clients and family.

 

Short Recession

Favorable Indications

A market analytical tool that has been around for more than one hundred years requires two Dow Jones stock averages to be going in the same direction.

 

The question is whether we have already not only entered an economic recession but are demonstrating signs of a bottom.

 

The chart pattern of the Transportation Average is showing early signs of a market bottom, with the Industrial Average further behind in its chart development.

 

To me the Transportation Average is a more reliable indicator of what is happening, with the Industrial Average an indication of what investors think about the future.

 

I wonder whether the current administration, like President’s past, will declare operating railroads essential to national defense and step into what looks like a pending national strike.

 

Industrial prices lead wholesale, retail, and consumer prices. The JOC-ECRI Industrial Price Index fell -3.14% this week and is down -9.29% year over year, with Oil, Copper, and Wheat among the drivers.

 

On balance I am more impressed with the trading skills of those using NASDAQ stocks, than those limiting themselves largely to NYSE stocks. In the latest week, more shares listed on NASDAQ rose than fell, 11.4 million vs 10.2 million respectively. The opposite was the case on the NYSE, with 8.3 million rising and 11.2 million falling.  

 

Traders are demonstrating better timing than investors but not gaining as much.

 

Unfavorable Indications

Sloppy analysis uses stock prices being historically attractive, with current prices and the last reported earnings or estimates. The price/earnings ratio on this basis has dropped to the long-term average range. Usually, a sign of value is when P/Es are substantially below average.

 

Quite a few recently reported earnings were substantially below prior estimates. As bad as these reports were, I wonder whether they captured the deterioration of their businesses. I have not seen write-downs of the values of their inventories due to lower priced raw materials, the shift of customer buying practices to more essential goods, or the slower payments of accounts payable.

 

As a publishing entrepreneur I had to deal with some of the biggest financial institutions in the world., They were slow payers. Meanwhile, I had to pay our people on time, as well as our rent. I did not “factor” or borrow against our receivables as the lenders would have discounted their value, even though they all eventually paid.

 

When we investigated investing in troubled or bankrupt companies for clients, we discounted receivables and wrote down both raw materials and finished goods inventory, as well questioning the value of fixed assets. If we could find a going concern buyer for which we ascribed value to the prospects not there, we attempted to ascribe value to their hard-working and highly competent work force and good customer relationships.

 

A recent Financial Times article heralded the end of the easy to borrow money period, making acquisitions more expensive and difficult to do. Plus there will be fewer opportunities for M&A and IPOs

 

Each week The Wall Street Journal list the prices of 72 security and commodity indices, as well as currencies. In the latest week 75% went down.

 

Working View

The betting odds seem to be against a quick, short recession, but it could happen. If it does happen, I don’t think we will address the serious questions holding us back from our optimum potential.

 

Odds are, if we have a short and shallow recession, it will in time be followed by a longer and deeper recession addressing some of our problems.

 

Unaddressed Problems

1. The average US high school student ranks 37^th in international rankings in math and science.
2. The groups dictating to our medical system are tort lawyers and insurance companies, which is not conducive to producing the best healthcare for us.
3. A declining military system more interested in social goals than possessing enough power and training to deter potential aggressors.

 

 

 

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

https://mikelipper.blogspot.com/2022/07/time-to-be-contrary-weekly-blog-741.html

https://mikelipper.blogspot.com/2022/07/mike-lippers-monday-morning-musings.html

 

https://mikelipper.blogspot.com/2022/06/switching-prime-focus-weekly-blog-739.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 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

  

Time to be Contrary? - Weekly Blog # 741

 

Mike Lipper’s Monday Morning Musings

 

Time to be Contrary?

 

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

   

 

 

Inconclusive Week

Few US stock market participants considered the news of the week as a reason to significantly change their current investment position.

Bear markets result from market transactions based on investment outlooks, which are sometimes wrong. Recessions are economic downturns. Most often bear markets lead to recessions, but not always.

Nothing very good or bad came to investor’s attention. The news about employment, inflation, interest rates, and politics, slightly encouraged people’s biases but did not lead to any reversal of opinions.

Two things a historian might add are: 

• A growing view that the oncoming recession will be slight and probably quick. (Interest rates from 2 to 30 years are remarkably flat for US Treasuries.) 
• A quick, shallow recession leaves little time and momentum to correct multiple imbalances in our society.

If we are not going to address our problems we should focus on the recovery, which may be shorter than in the immediate past. With that possibility in mind, one might examine some contrary thoughts concerning various portfolios.

 

Understanding Contrarian Thoughts

Contrarians probably recognize that no single school of thinking produces winners all the time. Furthermore, contrarians are not smarter than those more comfortable alongside the perceived majority of “smart” people.

The differences between the two types of thinking are as follows:

1. The majority extrapolate current trends or views, whereas contrarians expect change, even if it goes back to some prior period.
2. When the majority are correct in their predictions the returns are normally relatively small compared to those earned by contrarians. Even with the majority being correct more often than contrarians, over many cycles they will earn less.
3. As neither type of investor totally avoids mistakes, losses need to be considered. When the majority wants to exit it will have lots of company, which can depress exit prices. Since contrarians don’t invest in popular issues, they typically don’t pay extravagant prices. Consequently, their exit prices are usually closer to their entry prices. The majority loses dollars, the contrarian loses time.  

 

Summer Contrarian Thoughts

Current markets appear to rotate more on changes in sentiment than on reported financial and economic results. We won’t officially know for some time whether we are entering a recession, although many feel we are already in one. We clearly have been in a bear market decline from the peaks in January of ’22 or November of ’21.

It is quite possible the recent decline in retail goods sales is the result of growing recession chatter.

This blog is written for long-term investors, not short-term traders. Traders and investors are often on different sides of a trade, with each being right based on their own period and performance standards.

For the moment, regardless of your own point of view, assume we are progressing through a bear market into an economic recession of some length and depth. Nevertheless, we believe that at some point in the future we will be in a rising market and an expanding global economy.

Our task is to select winning investments for a lengthy period or periods. A good place to start our search is the performance periods ended June 30, 2022. As a contrarian one would reverse the performance ranking order of various investments, including mutual funds and individual securities. 

This process creates a search list, not a performance roster. Not all securities reverse their relative performance rankings as they move from one market cycle to the next. The critical research depends on finding new reasons the security in question is appropriate for the change in conditions in the new cycle. A few will.

 

An Analysis of Market Price or Market-Cap Indices can be Helpful

The Dow Jones indices are weighted by market price, whereas the S&P is weighted by the number of shares outstanding multiplied by the stock price. While the publishers make the original name selections, the individual weight of a stock is influenced by the movement of the stock price for the Dow indices, and the price multiplied by shares outstanding for the S&P.

They are both popularity measures and during periods of up or down trends their movement is determined by the unexplained actions of market participants, not direct investment judgement.

We see the same thing at racetracks using the pari-mutual odds system.  Winning horse backers are rewarded based on the ratio of the aggregate amount bet on the winner compared to all other bets, less the “take” of the track and taxes. The horse bet on most is called the favorite. All other entries will make more if they win, sometimes a great deal more than successful bettors on the winning favorite. Historically, favorites win around one-third of the time, thus those who bet only on favorites must lose in aggregate over time.

This is not necessarily true for index investors because markets go up most of the time due to dividends and expectations. However, this is not always true as in the first half of ’22, where the major stock indices were sharply down for the period. The S&P 500 index is made up of eleven component sectors and only energy stocks rose, representing just 2% of the index.

One problem for the S&P 500 index is the way market capitalization works. Of the 11 sectors, 8 performed worse than equal weighted sectors. Thus, in aggregate the weighted judgment in the market was wrong for this time-period, just like most favorites at the track.

I am not suggesting the market is always wrong, but it can be wrong some of the time. My investment suggestion is, if you select an index fund to participate in an up market, a weighted index fund makes sense on average. If you are more risk averse and feel more pain from periodic losses than from a similar gain, an equal weighted index fund is better. An equal weighted index may also be a bit safer if the current market trend has been going up for some time.

 

Is your Income or Spending Influenced Beyond the Border?

Since Adam Smith published “The Wealth of Nations” in 1776, I believe almost everyone has been influenced by different price levels, the availability of products, and opportunities influencing what we spend and earn.

Scott Galloway, a NYU Stern Professor, noted that this is in part due to individuals with foreign backgrounds coming into our country. He said “Almost half of Fortune 500 companies were founded by American immigrants or their children and more than half of unicorns (private companies worth more than $1 billion) are founded by immigrants.

While the data is not transparent, it is reasonable to believe that at least 25% of US reported corporate profits are sourced from our exports or foreign operations. Thus, I believe that for long-term investment portfolios to generate the level of income needed to buy all the items that we import now or in the future, we must invest a portion of the portfolio abroad.

If a sound long-term multi-generational portfolio is to be well balanced and provide income for consumption, it should probably be invested in both growth and value stocks. The latter’s time horizon is probably shorter than growth investments and more likely to be domestically oriented. (Due to legal and tax issues)

A reasonable approach is to look for more international representation in the growth portions of the portfolio. This is buttressed by the better math and science scores at secondary schools overseas.

The value of the dollar has been rising, not because things are getting better here, but because of local economic problems elsewhere. As a contrarian this seems to be an opportunity to buy cheaper foreign currency instruments for a long-term portfolio. Long-term investment opportunities in companies doing business in Asia should be considered due to demographics, discipline, and supportive governments.

 

A Contrarian View on Private Investing Now

One lesson from both the track and investing is that a crowd of new participants signaling excessive enthusiasm can lead to a bubble. A sign of this risk building is highlighted in a recent Wall Street Journal article headlined “Private equity Poaches Talent to Chase Wealthy”. Wonderful returns have been generated from investing in private equity and somewhat less in private debt. My concern is that practically every financial services organization is offering services to the private market. We are already seeing private companies delay going public to get higher prices through constant money raising. At some point prices will reach a peak and collapse. Successful contrarians try to not be late and avoid waiting for bargain prices.

 

Please Share Any Agreements or Disagreements

 

 

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

https://mikelipper.blogspot.com/2022/07/mike-lippers-monday-morning-musings.html

 

https://mikelipper.blogspot.com/2022/06/switching-prime-focus-weekly-blog-739.html

 

https://mikelipper.blogspot.com/2022/06/are-markets-getting-too-far-ahead.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 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

  

Stress Tests - Weekly Blog # 740

                                    

Mike Lipper’s Monday Morning Musings

Stress Tests

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

Next Phase

Investors are not happy with the current phase of the market, which could be labeled a transition starting in late 2021 or January of ’22.

We left a stimulated expansion and rising US stock market for a contracting “bear market” and likely economic recession. 

The stock market performed its traditional function by discounting the future and falling before an economic contraction began.

The Federal Reserve was on its original mission, performing the function that it is perhaps best suited to accomplish, the protection of the banking system. (One can question the wisdom of assigning other responsibilities to the Fed.)

The Fed has learned that banks should have balance sheets assuring their survival in potential economic contractions. The Fed consequently required banks to show they could survive possible severe economic conditions, without necessarily predicting them. 

The tool used created very severe stress tests. The way the Fed used these tests limited the bank’s commitment to expansion and dividend increases. All banks passed the minimum requirement in the last stress test, although JP Morgan Chase and Citi were refused permission to immediately raise their dividend.

Many were shocked that JP Morgan was not given permission to raise its dividend. Afterall, the country’s largest bank had styled itself a fortress to defend its depositors from major problems. (Including ourselves) From the Fed’s perspective the bank was expanding too fast, especially if a very serious economic contraction materialized.

Surviving investors learn from changing conditions and I am now applying stress tests to how I manage money for clients and my family.

How Deep & Long a Decline

Applying an overly stringent set of filters to the oncoming contraction is creating stress for me and our accounts. Over the last two weeks the US and Chinese stock markets rose, while bond credits and commodities declined. A rise in stock prices is normal during bear market rallies on below average volume. 

The decline in the other asset types is worrisome, as they tend to be owned by more risk aware investors. In general, these asset types generate less capital appreciation than the average stock and are time constrained. Stock investors often view moves within the fixed income and commodities markets as warnings for the stock market.  

An offset to this bearish picture is to remember that falling prices and low volume should be viewed as an opportunity. Howard Marks, an old data client and very successful investor is quoted as saying “Today, I am starting to behave aggressively”.

Strategic Selections

Picking the highest performing strategy at the exact right time will produce great results, but good luck achieving that. 

For prudent risk-aware investors, a more comfortable strategy is the right combination of a limited number of strategies. This is an artform that great portfolio managers demonstrate most of the time.

My personal stress test perceives the adoption of at least five logical strategies as we exit this interregnum phase.  

Five Strategies

1. There have only been a small number of bear markets without a follow-on recession. One example is the Fed’s gigantic growth of money supply during the Trump period. It came so fast that a “value investor” like Warren Buffett did not have the opportunity to buy large amounts of good companies at fair prices.
2. In a “normal” cyclical recovery, asset prices for stocks drop to sounder levels as probable results are discounted. 
3. Structural recessions usually address economic imbalances through the liquidation of debt, which often requires a well-known financial player to collapse in some financial crisis. Currently, the largest debtor relative to revenues is the US government. (The continuing obligations of the US government are materially greater than its tax revenues, leading to increased levels of deficits.)
4. A depression is triggered by the political establishment policy mistakes intended to solve short-term problems requiring deep social restructuring. A classic example was the tax and tariff policies of the late 1920s, followed by the radical restructuring attempts in the 1930s. This turned a 5-year cyclical recession into a 10-year depression.
5. Stagflation occurs in a period of slow revenue growth combined with high inflation and unwise regulation. We suffered such a period in the 1973–1982-time frame.

The five strategies listed are in rough order of the shortest expected lapsed time in a bear market without a recession, and the longest stagflation. Another critical time scale is your expected investment period. For the longest periods, e.g., a grandchild’s college endowment, very little in the way of reserves are needed. More reserves are needed to offset potential losses due to unfortunate timing in shorter time periods.

Selection Guidance

Over extended periods, the aggregate performance of “growth” and “value” are about equal. However, there are two main differences in the selection process; tolerance for volatility and how the main financial screens are utilized.

Growth investments tend to be volatile based on news. You consequently need to pay intense attention to any element impacting the income statement, particularly net cash generation excluding all uses of cash or buying power.

Value investments appear less frequently in the media and thus tend to be less volatile. This is particularly true if they pay a regular dividend, which is hopefully growing. The adjusted balance sheet is the most important document in their selection and includes the current pricing of all assets and liabilities. Additionally, the value of people, customers, brand name, patents/copyrights, or under-utilized resources need to be added. You need to add all reasonable contingencies, including the shut down costs of work sites and people. In many cases, a forensic accountant and bankruptcy lawyer is needed.

WHICH DIRECTION?

The main reason this blog is titled “Stress Test” is that there are currently “green shoots” of positive information as well as disappointing signs. Reasonable analysts may disagree on both the importance and characterization of listed items in the proper category. Nevertheless, I pay attention to all as possible signals of things to come. 

I welcome all views that agree and disagree the view expressed.

Positives

• The JOC-ECRI Industrial Price Index weekly change was -2.47%
• The AAII 6-month bearish view was 46.7%, vs 59.3% the prior week. (This was a move back from a very extreme position the prior two weeks, viewed by market analysts as a contrarian indicator.)
• Copper prices are recovering from a high price in April due to rising Chinese demand.
• In last 3 months, M-2 money supply growth was only 0.08%.
• Fed funds futures prices are dropping.
• The bond market appears to be capitulating,
• The combination of China producing both a hypersonic stealth bomber and a 4th generation aircraft carrier, should be good for defense spending.

Negatives

• According to the American Farm Bureau annual survey, the cost of a July 4th picnic has risen 17% in the past year to $69.68.
• Tech companies, among others, are laying off workers.
• The Atlanta Fed is forecasting a second quarter contraction of 1%. 
• I wonder how much of the relatively low trading volume on Friday was short-covering before the long weekend.
• The claim that the market is priced more attractively now than earlier in the year looks questionable, as pundits are using current prices and what I believe to be “stale” earnings estimates. The severe drop in June sales may have led to considerable write-downs of inventories and prices. 

IT IS IN PERIODS LIKE THIS THAT INVESTMENT MANAGERS EARN THEIR FEES.

 

Please share your thoughts for the next great investment idea.

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

https://mikelipper.blogspot.com/2022/06/switching-prime-focus-weekly-blog-739.html

https://mikelipper.blogspot.com/2022/06/are-markets-getting-too-far-ahead.html

https://mikelipper.blogspot.com/2022/06/pick-investment-period-strategy-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 - 2022

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.