If Not the Bottom, Then What? - Weekly Blog # 752

 

 

 

Mike Lipper’s Monday Morning Musings

 

If Not the Bottom, Then What?

 

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

    

 

 

CAVEAT

We admit we don’t know what the future holds for us. I am falling back on my instinct to view things as bets with their own uncertain odds.

 

Investment Markets Decline on September 23^rd

Leading central bank interest rates, set by to fight inflation, are attempting to peak in the near future. (My guess is that they won’t be successful at current levels until they switch from attempting to reduce demand, to increasing supply, which is more difficult.) With sub 4% rates for US Treasuries, 10-year high grade corporates at 4.6%, and medium grades at 5.23%, the premium for government paper appears to be in place. However, it’s insufficient if demand curtailment works and drives up defaults.

The battle against industrial goods inflation may be close to won, with the year over year change in the JOC-ECRI industrial price at -9.69%, gasoline demand down almost -8%, and distillates down about -16%. (I think it is going to be more difficult to address inflation in services, which is mostly comprised of wages for talented people. Furthermore, food prices are much more dependent on the global decline in land use and availability.

As usual, the high-quality fixed income markets are more advanced than the equity markets.

Did Friday’s stock market decline signal a bottom? Possibly, but it did not completely fit historic patterns. While the Dow Jones Industrial Average established a new low for the year, the S&P 500 was the third lowest, and the NASDAQ the fifth lowest. Considering the latter two indices had greater gains, the fall of the DJIA is less impressive. While there was an increase in transaction volume from a low base, it was not impressive. There are no signs of mass capitulation at public or institutional levels.

 

Outlook

There are four possible paths forward. In order of time magnitude and pain they probability are:

1. A bear market without a recession has happened a few times and is largely a price correction. We are closing in on that.
2. A cyclical recession is usually driven by commodity prices or other supply issues. This is satisfactorily addressed in a few years.
3. A structural recession due to systemic imbalances of power and leadership require major changes, which drastically alter society. Depending on on the level of violence, it can take many years.
4. Stagflation, where a portion of the society/economy sacrifices involuntarily to the other until there is a counter-revolutionary force. There is usually a period of mismanagement and legal turmoil. We have experienced two periods like this in the past beginning in the 1930s and 1970s.

Each alternative is possible. Prudent investors should make up their own minds as to what is probable for their beneficiaries and careers. (To be discussed later.)

Before choosing your expected future, there is a new threat and lesson which surfaced this week.

 

London’s Future Lesson and Threat

This week, the brand-new Prime Minister announced a very expensive plan of pump-priming and tax reduction for individuals. The reaction of the London investment market and currency was shock and fear. The former US Secretary of Treasury and former President of Harvard summed up the view of many on both sides of the Atlantic that these were “the worst possible policies”.

There are two lessons for the US from these policies which march down the same road as the current US administration.

The lesson for US and other investors is that the value of one’s currency shapes the willingness of foreigners to invest in the currency. The independent Bank of England, their central bank, raised interest rates by 100 basis points earlier in the week before this announcement. On Friday there was a call for the BOE to immediately raise rates another 100 basis points.

This controversy is important for the US with its highly rated currency, which somewhat ironically had the second biggest gain for the week according to the Wall Street Journal. (The only currency that had a bigger gain was the Russian ruble, +4.54% vs.+2.57%.)

Investors, traders, and customers look at the currency behind the source of earnings in today’s currency markets. We are all familiar with the “Petrodollar”, which is based on the earnings derived from petroleum production and sale. To some degree, the tag of Petrodollar has also been placed on the currencies of Russia and Canada, among others, in addition to various Middle Eastern countries.

While it hasn’t been popularly done before, I believe we may now see a financial pound label placed on the British currency. A major part of its earnings come from its transaction markets and multinationals headquartered in the UK with export earnings, as well as contributions from my wife at her favorite shopping location.

We should watch what happens in the UK as an indication of a possible trend for the US.

 

Investing Equity Reserves

Last week’s blog suggested a tactical plan to reinvest reserves coming from equity investments, or from cash flows to be invested in equities.

Investors will be benefit from dollar cost averaging no matter which frequency is used. They will also benefit from the selection of one of the four alternative futures outlined above.

The most important long-term decision regarding the ultimate value of the account is to not get too comfortable with cash reserves while interest rates earn single digit returns. This will be costly, as stock markets go up as rates come down, resulting in some principal loss. More important, time not invested in equities at low prices will be lost. For taxable investors, the difference in taxes on interest and gains can be meaningful, particularly in well-constructed estates.

In making choices where time horizon is appropriate for your investments; I expect the last two scenarios to be the most likely based on today’s information. For example, Walmart is not building inventory and staff for the holiday season. Their shoppers for the most part are modest income, savvy buyers. If Walmart is not expecting a good holiday season for itself, one should question how quickly inflation will drop below 5%.

Typically, a well-known name disappears from the marketplace due to severe financial trouble. None has so far, but you might see a rescue merger or court action.

I have no inside information, but I am concerned that reported earnings and more importantly values are overstated for the current economy, making market valuations questionable. One such possible company is Credit Suisse. The pundits are quoting it as selling for almost 20% of book value! I am sure this is not a singular situation.

 

Please share your views.       

 

 

  

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

https://mikelipper.blogspot.com/2022/09/planning-for-rising-stock-prices-weekly.html

https://mikelipper.blogspot.com/2022/09/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2022/09/i-can-be-wrong-weekly-blog-749.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.

  

 

Planning for Rising Stock Prices - Weekly Blog # 751

 

 

 

Mike Lipper’s Monday Morning Musings

 

Planning for Rising Stock Prices

 

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

    

 

 

Contrarian Concerns

If only we could be unbiased when observing stock markets and investors. We might get clued into probable future steps we should take. We should examine all that is exposed to us. The strengths and weaknesses of realities, rumors, and reactions. In many cases crowds believe in "facts", which when fulfilled provide comfort. In much the same way contrarians often see the opposite in the same set of facts.

 

For an extended period, I have been seeing growing evidence of problems for various stock markets and related countries. I was comfortable with these feelings because relatively few perceptive analysts and other investors shared them.

 

Now, the worst of all possible trends is befalling a contrarian. The attitude of many sophisticated stock market investors is turning, echoing the attitude of the US Treasury bond market. Worse still, leaders in the commercial world are dealing with a present and likely future collapse of demand for their products and services.

 

International Paper, Packaging Corp, and West Rock (*) announced a massive inventory glut of containerboard, which is critical in packaging most shipped goods. Consequently, I was not surprised by FedEx's quarterly earnings announcement, which fell 32 % below analysts’ estimates. The release indicated the company was reducing usage of its plane fleet, closing offices, and cutting expenses.

 

When operating companies have these problems it almost always means smaller M&A activity and underwriting. Thus, it is not a surprise that canny Goldman Sachs (*) reintroduced a policy laying-off the bottom performers of its talented staff. This week's IPO actions by American International Group (*) have them selling some Corebridge Financial at the low end of the expected price range, which fell below the issue price in the after-market.

 

(*) Held in personal accounts

 

My reaction to this negative news was to accelerate my previously mentioned plans to look for new buying opportunities in new names.

 

An Organized Search Process

I have had discussions with sophisticated investors who have exited the equity market with 30% or more of their prior commitment. This has created a potential 30% buying reserve.

 

As subscribers to this blog know, I question whether we have seen the bottom of the US stock market decline. The S&P 500 hit its technical price low since June at roughly 3900 this week. One respected market analyst’s response was that the index had bent but did not break.

 

I don't know if the September or June bottom will hold or break at the 3600 or 3000 level. Although it is possible we have seen a bottom from which an upward expansion could take place.

 

My tactic in this case is to dollar cost average into favored investments. I divide my purchasing reserve by 6, putting 5% into the purchase bucket. One reason I believe we are likely to go into a serious recession or worse is that I see too many imbalances, with declining efficiency and productivity in the economy. Although I could be wrong. The way I deal with it is to invest differently than what produced my existing portfolio. So, if the market is flat at the end of the reinvestment period, I would have 70% in the original holdings and 30% in new thinking.

 

The first hurdle is determining the frequency of investing is the reinvestment money. One could choose monthly, quarterly, or yearly. That decision should pivot on the kind of decline expected. It could simply be a price decline where monthly investing generates a good result. If you think the market went down primarily because of imbalances in the economy, then investing quarterly makes sense, as these problems won't be solved until next year at the earliest. Although the market should anticipate this event somewhat. An annual investment makes sense if you believe we might be entering a period of stagflation.

 

At first blush the annual investment might seem excessive. However, we experienced two periods of stagflation in the 1930s and 1970s, which suggests it could happen. Since everything these days seems to move at warp speed, I searched the mutual fund data bank produced by my old firm this week. I examined the 170 mutual fund investment objective performance groups averages through this Thursday. While most had a down calendar year, prior years were positive.

 

For the last three years 40% of the performance averages lost money. Thirteen percent lost money over five years and 5% lost money over ten years. These numbers suggest we could be in for a long dull period.

 

The reinvestment plan I am suggesting is not a hands-off procedure. Anytime the targeted investment is off 10% from the prior determined period, I would double the commitment. This may produce a bargain for the investor. It also reduces the length of the investment period. On the other hand, if the target price drops 25% I would pass on the opportunity and wait for the next period, assuming the basic research remains favorable.

 

What to Buy to Complement the Portfolio

Remember, reinvestment is meant to offset investment opportunity in existing holdings. I suspect most holdings are dollar dependent, so at some dollar level the US will price itself out to foreign buyers. Internal political issues in various countries will also improve.

 

For those that have never owned a stock traded beyond our border, I would start with some Canadian holdings.

 

India has the largest middle class in the world. Other Asian countries, including China, are a good hedge against the dollar.

 

Another approach not in many portfolios are companies developing new products and services to fill unmet needs for new products/services not currently available.

 

If the individual selection of securities takes up too much time and you lack confidence in your selection, you can use mutual funds. As these funds are intended to address other needs in an investment portfolio, the following list of attributes may be useful in the selection process:

• The portfolio manager has ten years of experience running the fund, with a record that can be researched to understand down periods.
• A focused portfolio of under 70 names in two handfuls of sectors.
• A portfolio letter released at least semi-annually that is easy to read. It should be about the portfolio and not the economy.
• A proper discussion of what didn't work and why, without blaming others for mistakes.

If all of this is too intense, I suggest index funds covering large and small companies, both here and overseas. Most index funds track a published index in terms of weighting how much to invest in each security. This is where a critical decision must be made. Most index funds own the same percentage the stock has in the index. Consequently, a handful of the biggest positions in the fund will drive performance in rising markets. While great in a rising market, it could be a negative in a declining market where investors sell their most liquid holdings. Equal weighted index funds in some cases will slightly underperform on the way up but decline less than capitalization weighted index funds on the way down.

 

Question of the week:

Are you open to investing differently for the next good market?

 

 

 

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

https://mikelipper.blogspot.com/2022/09/mike-lippers-monday-morning-musings.html

 

https://mikelipper.blogspot.com/2022/09/i-can-be-wrong-weekly-blog-749.html

 

https://mikelipper.blogspot.com/2022/08/4-5-changes-disruptions-faulty-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.

  

Going to Where the Puck Will Be - Weekly Blog # 750

 

  

Mike Lipper’s Monday Morning Musings

 

“Going to Where the Puck Will Be”

 

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

    

 

  

Lonely Strategies Applied to Investing

Wayne Gretzky, the great Canadian ice hockey player, contributes much of his over 20 year playing success to skating to where the pluck will be, not where it was. He was betting on a specific change.

 

How much of the bet was based on his belief that his teammates would send the puck in a new and beneficial direction? Or did he believe the play would lead to the puck being hit in a different direction? I don’t know. Nevertheless, he positioned himself in a less crowded or lonely position.

 

In a career analyzing winning investment managers, one repeated characteristic is being early to recognize an investment opportunity and staying with that choice for an extended period.

 

The benefits of being early are two-fold:

1. Fewer competitors taking positions
2. Taking up less of senior management’s time (perhaps even more valuable)

 

Another advantage of being reasonably early is that the price paid is often in line with what a disinterested investor would pay. Likely reducing the size of the loss if the expected doesn’t turn out as hoped.

 

Two Current Possibilities

If one is to believe what is currently being written by many. We have seen the bottom of the US equity market, the rate of inflation is about ready to roll over, and the investor is about to be ushered into a new bull market.

 

All could happen. However, the responsibility of an investment manager is to examine views different than those which are popular. This examination could be a good exercise and might even be correct.

 

The June Bottom

Two and half months ago, in mid-June, the popular US stock indices fell to their low point of the year. The averages rose in July but were relatively flat in August, then started to rise again. The table below shows their low for June, their closing value on September 9^th, and their % change:

 

Index             June Low    Sept 9th  %Change

Dow Jones Ind.    29,888.78   32,151.71   7.57%

NASDAQ Composite  10,646.10   12,112.21  13.77%

S&P 500            3,666.77    4,067.36  10.92%

 

Traditionally, a bottom price is accepted when a subsequent decline is in the same range as the first bottom price.

 

Bottoms also generally occur after capitulation of an important segment of market participants.

 

Neither of these have happened yet.

 

Although the Atlanta Federal Reserve Bank is currently looking for GDP growth, Morgan Stanley and others are expecting declines for some large earners.

 

In past bear markets there have been short bursts of upward prices, often occurring after a period of declining prices. This leads to traders shorting the market. A subsequent sudden price rise would likely force traders or their custodians to cover their shorts.

 

September is a tricky month, as the outlook for the winter shopping season becomes clearer. With sparse inventory, the absence of salespeople in stores, and some weakness in advertising, I would be more comfortable with a confirmation the bear market is over.

 

Rate of Inflation is All Important

As a numbers cruncher I like the attention being paid to this abstraction of reality, but it is not the reality itself. I am much more concerned with reality than the number to the fifth decimal every hour on a screen.

 

For risk-aware investors the nastiest word in our language is leverage, yet it is the basis for all financial growth. After the Volcker Recessions and Global Financial Crisis people desperately tried to recover. Often using leverage in an attempt to generate larger returns.

 

We are well aware of the use of borrowed capital to make money. This is what most in the financial community think of when speaking of leverage. People don’t generally label sales growth and productivity as leverage.

 

Sales leverage comes from getting more profits out of sales, either through generating more sales or selling a product or service for more than its cost to produce. This is often called productivity.

 

We have stretched sales leverage to an unsustainable level, which combined with bad labor management has led to lower productively. This is one of the reasons I feel the world is going to have a recession, which when badly managed will lead to a depression.  

 

Google, one of our great tech companies, is hinting at job cuts. They are approaching the point of too many employees for the expected level of sales.

 

I am disappointed with the quality of people being processed through schools of all levels. This, combined with the reduction in the number of supervisory personnel and executives prizing political skills over leadership. These lead me to believe the problem is not the number people. The problem lies in having the wrong people in positions where they are not properly trained to lead even small groups, let alone large groups.

 

History demonstrates that it unfortunately takes long periods for societies to eventually address their imbalances and grow results successfully.  

 

Question of the week:

What are you going to do to make things better for those who depend on you?

 

 

 

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

https://mikelipper.blogspot.com/2022/09/i-can-be-wrong-weekly-blog-749.html

 

https://mikelipper.blogspot.com/2022/08/4-5-changes-disruptions-faulty-weekly.html

 

https://mikelipper.blogspot.com/2022/08/mikelippers-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.

I Can Be Wrong - Weekly Blog # 749

 

 

 

Mike Lipper’s Monday Morning Musings

I Can Be Wrong

 

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

    

 

 

Property of the Territory

As an odds addict, I often make bets prematurely. I am used to being wrong on individual choices but feel comfortable with my weighted choices.

 

The advantage of being wrong is learning from it. As a market-oriented analyst and manager I equate a bear market with a recession.

 

Our clients and I feel more pain when surprised on the downside.

 

In November of ’21 stock price momentum started to slow. This was particularly noted in the growth-oriented NASDAQ market, which hit its historic high that month.

 

Also noted in carefully reading fourth quarter comments from insightful CEOs was a slower quarterly rate of gain vs the prior year. This caution was also noted in early 2022 statements.

 

Much was made of “supply-chain” problems, although it was focused almost exclusively on goods capacity limitations, not services.

 

To me they left out the growing realization that there would be a shortage of competent people to hire. What really caught my eye in the recovery from the pandemic cutbacks was first- and second-line supervisors not being replaced.

 

My conclusion was that leading growth-oriented companies were likely to produce sub-par results for ’22. I did not fully appreciate the goods slowdown impacting the much larger economic services sector.

 

My mistake was labeling the forthcoming environment an oncoming recession. It was clearly derived from stock market price probabilities.

 

A recession is a much broader national and increasingly international phenomena. The accepted definition of a recession results from top-down late-reporting data, with even later corrections.

 

Typically, by the time the academics identify a recession it has already changed, often improved.

 

Politicians choose to focus on the gross economic numbers impacting voters most. Not fully appreciating the indirect impact of market prices on the purchase patterns of almost all voters.

 

I was precisely wrong or premature in labeling the first half of ’22 a recession. Falling stock prices had a direct and indirect impact, probably hurting the average American by about 10%.

 

Current Data Bank of Concerns

• The yield on 2-year Treasuries is 3.398%, which is higher than both 10 and 30-year Treasuries. Historically this is an inflation predictor.
• Market analysts are concerned about reversal price patterns building in major indices, including the Dow Jones Transportation Index.
• Last week, 80.5% of prices fell on the NYSE, but only 71.4% on the NASDAQ. The latter has been a better predictor than the former, probably because the NASDAQ has more professional investors.
• The American Association of Individual Investors (AAII) survey has a somewhat extreme 50% bearish reading for the next six months, often a contrary indicator.

 

Longer-Term Concerns

• One forecaster believes unemployment will hit 6% and inflation will not decline to 4% by 2024.
• Niall Ferguson of the Hoover Institute believes the “World is sleep walking”, similar to the 1970s but worse. Suggesting that instead going into a recession we will experience a multi-year period of stagflation, with low growth, high inflation, and unemployment.
• My major concern is the lack of good leadership from our highest political and commercial elements throughout the world. Two examples are:
• Annual reports no longer stating employees are their most important asset. (When I sold our data business to Reuters, I told them our most important assets were our clients and our people, not our best available data.) This personality focused leadership is an important contributor to the growth of unions, which is not positive for customers and shareholders.
• The war in Ukraine has demonstrated what I learned in the US Marine Corps, that well led small units can effectively beat a larger force relying on massed manpower.

 

Question: How different do you think 2024 will be than today, and are you structuring for it?

 

 

 

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

https://mikelipper.blogspot.com/2022/08/4-5-changes-disruptions-faulty-weekly.html

https://mikelipper.blogspot.com/2022/08/mikelippers-monday-morning-musings.html

 

https://mikelipper.blogspot.com/2022/08/time-to-prune-weekly-blog-746.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.