Rarely Found Different Thoughts - Blog # 757

 

Mike Lipper’s Monday Morning Musings

 

Rarely Found Different Thoughts

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

            

 

 

Unexamined thoughts can contain time-bombs antithetical to generally accepted views. Good professional scouts (analysts/portfolio managers) should review as many unexamined thoughts as possible to find comfort in their present views, or look for possible reasons to change them.

The closer you focus on media designed for mass audiences the smaller the focus on detail. This results in more emotional and decisive views. The conclusions might end up being correct, but the historical odds of being right are substantially below half.

A good example is the reported percentage gain from the June lows for the 3 popular stock market averages. Most of the media, with their limited space and time, tend to focus on the results of the 30 stock Dow Jones Industrial Average (DJIA). You get a distinct happy view that this senior index is up +14.40% from its low point, which is in the mid-range for rallies after a sizable decline.

A much larger sample found in the S&P 500 index, weighted not by price but by market capitalization, has gained +9.05%. This is a more normal sized bounce, not the large gain seen in the DJIA. Considering this index is experiencing a period of increased volatility and is only up 353.44 points, it seems more like a rally in a traditional “bear market”.

Tech-oriented stocks led global markets both in the last expansion and during the most recent decline. There were some notable near-term declines in earnings and or future guidance, yet their prices increased +6.58% as measured by the NASDAQ Composite. The sectors that go down most in a short-term market rally often lead on the upside too. No so now!!

The problem facing the world in terms of chatter by politicians and pundits is inflation. People don’t understand that inflation is a price adjustment mechanism to equate the value of goods and services to the currency at hand. Inflation is a measure, not the cause. It is created by perceived shortages, not excess demand. The shortages are partially caused by the declining productivity of human and financial capital.

The collective failure to address these causes suggests one should take a bearish attitude in anticipation of a probable recession. The real fear is that without addressing the real problems we will experience future deeper recessions, stagnation, or worse for capital owners, stagflation.

How do you see it?

 

 

 

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Mike Lipper's Blog: Current and Future Views are Confusing - Weekly blog # 756

Mike Lipper's Blog: Fundamental Changes Occurring - Weekly Blog # 755

Mike Lipper's Blog: Are We There Yet - Weekly Blog # 754

 

 

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Current and Future Views are Confusing - Weekly blog # 756

 

Mike Lipper’s Monday Morning Musings

Current and Future Views are Confusing

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

            

 

 

Current Sentiment Too Bearish?

Perhaps it is a COVID hangover or just the collection of largely negative inputs, but the numbers appear to be too negative. As a relative long-shot player, the growing number of largely negative elements suggests crowding, which is normally wrong.

 

To me, the single biggest negative for the next year or so is China. Looking at both US and Global Growth, if China can't grow 5%, can the rest of the world grow 3%. In my opinion, the key is whether the Chinese government will let its private sector expand at a 5 % annual rate.

 

Historically, one of the best guides to US consumer growth is how well Whirlpool (*) is doing. They have just announced a material cutback in domestic expectations, among others doing the same.

(*) A very long-term personal holding that has paid for lots of appliances over the years.

 

Last week, more US stocks rose more than fell. While the Dow Jones Industrial Average (DJIA) rose +8.21%, the more significant S&P 500 gained +4.91%.  This suggests more interest from the public/wealth management retail managers than from institutional money. Traditional market analysts have been waiting for the latter group to finally dump their holdings.

 

A possible answer to global inflation is only likely when severe and growing economic/social imbalances are addressed. This requires finding appropriate compromises, with solutions not likely to be acceptable to all. What magnifies the problem is envy, not the differences between people.

 

The genius of l776 was not the beginning of the American Revolution, but Adam Smith's publication of "The Wealth of Nations". Adam Smith made the point that nations can possess superior trade talents. They can and should trade with each other, valuing their respective superior skills. He was in favor of utilizing specialization as the source of trading profits.

 

Smith’s view is what made trade between the United Kingdom and the American colonies work. That is, until the Home Country wanted the Colonies to pay for their own defense and administration. Instead of allowing the Colonies to develop more of their own services and leadership, they imposed the cost of the most expensive army and navy in the world on them. Failure to allow the Colonies the opportunity to command was a classic failure of geo-politics.

 

Geo-politics is the art of various political forces cooperating to accomplish their own goals. Since the first development of armed forces, neighboring power centers could either fight each other or trade harmoniously. Early in the development of the single land mass encompassing the connected parts of Europe and Asia. Largely due to the military power of mounted troops.

 

Asia was conquered by the Mongol tribes as they pushed both south and west, occupying much of today's Russia, China, and India. Russia and China pushed back, with Napoleon and Hitler later trying unsuccessfully to push back further. Ukraine was an independent and viable state at times, with a significant population of Tartars. Stalin largely moved the Tartars out when he was in control. Through time Ukraine developed its own culture and religion. They also developed great scientific and mathematical skills.

 

Western European countries in search of raw materials developed African and Asian colonies. Germany only became unified later and had few opportunities to acquire foreign colonies. They accepted Britain's rule of the waves until roughly the middle of the 19th century. At which time, Then, German Admiral van Tirpitz began building up their fleet to become the second largest. He along with the German general’s staff also developed their geo-political thinking, analyzing both the land and sea battles of the American Civil War.

 

Although the American navy fleet was a poor third, President Teddy Roosevelt had it tour the world after the Spanish American War in the early years of the new century. American foreign policy pivots on domestic politics, with a strong tendency toward being isolationist. However, as early as 1890, American Admiral Alfred Thayer Mahan advocated for the US Navy controlling the open seas by forcing its way into various seaports and channels. He foresaw the eventual decline of the royal navy.

 

After "TRs" presidency, the US isolationist attitude of Presidents Taft and Wilson caused the USN's budget to be reduced. Furthermore, under Wilson the US stayed out of WWI until 1916. This probably sped-up the Russian Revolution and reduced the US' s practical role in the peace treaty. The consequence of which led to the beginning of WWII and our unpreparedness for the war, particularly with submarines.

 

Going back to Adam Smith's views, you do not need to go through naval and military adventures to establish sensible trade negotiations, as long as you have the desire and skill to accomplish them.

 

Applying these efforts to Ukraine is of greater importance today than in the past. Ukraine is one of the key players controlling the Black Sea, the location of Russia's only warm water port. As a result of the breakup of the Soviet Union, Kazakhstan and a number of other former Soviet Union independent mid-continent states want to export their mineral wealth and energy through the Caspian Sea and various pipelines. Additionally, Kazakhstan has a global airport with good connections to Asia and Europe. China on the other hand is counting on its rail connections to move freight into Europe and beyond.

 

The above history and its potential impact on the world advocates for the US needing to play a strong partner role in Ukraine and the mid­continent. Thus, I expect we will be there for a long time.

 

 

 

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

https://mikelipper.blogspot.com/2022/10/fundamental-changes-occurring-weekly.html

https://mikelipper.blogspot.com/2022/10/are-we-there-yet-weekly-blog-754.html

https://mikelipper.blogspot.com/2022/10/begin-to-dollar-cost-average-equity.html

 

 

 

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A. Michael Lipper, CFA

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Fundamental Changes Occurring - Weekly Blog # 755

 

Mike Lipper’s Monday Morning Musings

Fundamental Changes Occurring

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

            

 

 

People are changing their attitudes about what they do with their money and investments. Failing to define their changed concerns about the future, they are not happy. They appear to fear more fundament changes than just a relatively simple, shallow and quick, cyclical recession.

Without fully defining the cause of their fears, they are moving their cash and investment around slowly. Third quarter statements for leading commercial banks are showing increased deposits and the purchase of fixed income securities and loans. For their own accounts, leading banks are raising their bad debt reserves.

 

Liquidity

Jaime Dimond, the CEO of JP Morgan Chase, is worried about a possible future stock market decline of 20% due to credit concerns. Concurrent with liquidity concerns in domestic and international markets.

Most non-trading investors are unconcerned about the amount of capital on trading desks. This capital is needed to provide immediate support for transactions resulting from sudden and sizeable events. Last week, a well-known high-quality financial services stock had quite a day. After closing at $98.07 the prior day, it opened at $94.99 after a bad earnings report, then dropped further to $93.53 before rising to $102.66, finally closing at $101.96. Trading volume on the NYSE was higher by 1 million shares for the day. While the earnings report was less than expected, the closing price was roughly in line with prices paid over the past couple of weeks.

The price action of the stock suggests the NYSE market-makers did not have enough uncommitted capital to cushion the opening trade and early morning trading.

An indication market-makers are undercapitalized. This is a worry for all institutional sized investors owning shares listed on the “big board”.

 

Stock Strategy

Most of the time investors select stocks similar to each other, regardless of market capitalization. This is not currently true, with large-capitalization growth stocks leading the way since the June lows. However, smaller caps have been led by “value” stocks. This dichotomy is probably based on the belief that large-caps are more liquid than smaller-caps. Additionally, the average small cap value stock is cheaper in terms of price/earnings ratio.

However, if one sees the next market as essentially a recovery from the decline, you would be attracted to large cap growth, now selling under stock prices of two years ago. International mutual funds on average have three years of poor performance to recover from.

If you believe the next major move is a recovery, then large caps make sense. People currently find the low S&P 500 price of 3583.07 attractive. I am not such a believer.

Odds favor the next “bull market” having a largely different leadership than the last. In part, leadership will come from corporations positioned to be providers of products and services to a restructured world.

 

Public vs. Private Investments

Since the sailing ship days investors have profited from “carried interest” earned by ship captains and others on solid land. They benefitted from the price spread between what the owners of the ship paid for the merchandise and the price the captain negotiated upon landing. Carried interest is the source of wealth for Italian cities and Boston financiers nurturing the owner’s and captain’s wealth.

The same procedure was used by these firms when they invested in private companies. Boston law firms also used the same approach when they began investing in “privates”. (When I started visiting these law firms in the 1960s, they had more money under management in their trust-departments than mutual funds. They also had professional security analysts on their staffs.

Carried interest was used to connect portfolio people and salespeople with their wealthy families. The private equity business was founded through this union and grew significantly to include wealthy individuals and non-profit institutions.

Two other aspects beyond capital gains tax treatment aided their growth. A forty-year bond bull market generated capital to invest in private equity and private debt at very low interest rates. The privates also had a second advantage, their investors were trained to wait three to twelve months to see their investment returns. (By then their poor performance was not as painful as publicly traded investments reported with a one-to-ten-day delay.)

All of this is in the process of changing. There are now many providers of private funds with lots of spreadsheets. Interest rates have risen on leveraged capital. Many private funds are now investing in public securities and an investor or prospect can somewhat triangulate the private fund’s results. Private funds typically launch a new vehicle as soon as they can, often before the prior fund is fully invested.

I believe a handful of these funds will continue to produce good results. However, even these funds will be pressured by higher interest rates, competition for talent, and stronger negotiating people in operating companies. Only a few will produce exciting records.

 

Conclusion: Use dollar cost averaging to invest in good companies not already represented in your portfolio. The slower the better.

 

 

 

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

https://mikelipper.blogspot.com/2022/10/are-we-there-yet-weekly-blog-754.html

https://mikelipper.blogspot.com/2022/10/begin-to-dollar-cost-average-equity.html

https://mikelipper.blogspot.com/2022/09/if-not-bottom-then-what-weekly-blog-752.html

 

 

 

Did someone forward you this blog? 

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A. Michael Lipper, CFA

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Contact author for limited redistribution permission.

  

Are We There Yet - Weekly Blog # 754

  

 

Mike Lipper’s Monday Morning Musings

 

“Are We There Yet”

 

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

              

 

 

Immature Impatience

One experience learned from driving children on what seems to be a long trip is the repeated question of “are we there yet?”. What should be learned from this experience is the impatience of youth and their sense of elapsed time.

 

One way to look at the experience is in terms of the elapsed time as a percent of one’s life. For a four-year old, a single day awake is one out of 1460 days, whereas for a ninety-year-old it is one out of 32,850 days. Investors have been experiencing fluctuating prices for reasons we have attempted to explain for at least for 3,650,000 days, or since the world first began investing.

 

Attempts are made to explain a day’s price action tied to an established number or set of conditions after-the-fact. Hoping to quiet the chattering classes of young and old alike. The plain truth is that we don’t have a complete or even sound explanation with any certainty. Never-the-less, as self- appointed experts we attempt to quiet the chattering crowds.

  

Maybe We Have Seen the Low of 2022

In the artform of market analysis we require a low be declared post its occurrence, whenever another price decline comes close to the first and does not fall much differently than the declared low. On Friday we may have seen this phenomenon. (Percent above the prior lows - Dow Jones Industrial Average +1.91%, S&P 500 +1.51%, NASDAQ +0.71%, or close enough.)

 

Based on prior experience, evidence of a year’s low price would be identified by an oversold condition caused by an unusual period of net selling, which we have probably had. Additionally, the so-called VIX fear index has only risen to 30, not to the extreme level of 40.

 

As usual there are some contrary conditions. The most important of which is whether the declared low is for a relatively small cyclical price decline, or at worst a very mild economic recession.

 

Looking for a low to herald a structural correction, or worse case a period of stagflation. We have not yet seen any steps to address severe imbalances within the society. Nor have we seen a new leadership mentality from government, corporate/non-profit, or political segments which are desperately needed for a structural recession or a period of stagflation.

 

One major concern is the magnitude of recent price rises being less than prior expansions on a percentage basis. Due to societal and technological changes have we entered a period of somewhat limited, but significant multi-year gains.

 

Recent Thoughts which Could be Important       

1. Absence of multi-year profit projections
2. Will the return to physical on-site visits produce better insights?
3. A view of “Sell Hubris and buy humiliation”
4. Tesla’s market cap equals the sum of the European banking sector
5. The US strategic Oil Reserve is back to 1981 levels
6. The liquidity collapse in the UK has led to a possible 100 bps rise for US and other markets
7. Recognition that socialization of large bailouts is too expensive
8. Bonds not yet attractive on a capital basis
9. China’s growth is pivotal to global growth
10. Life insurance income statements benefit from rising interest rates
11. Top 5 holdings in index sectors that worked: communications 71.2%, consumer discretionary 64.6%, energy 63.5%, infotech 58.6%, consumer staples 55.0%. Thus just 25 out of 500 names hold 35.46% of the assets, disproportionately driving so-called diversified performance. While they have added to recent performance, will they always?

 

Question of the Week:

What odds do you place on a new market phase?

 

 

 

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

https://mikelipper.blogspot.com/2022/10/begin-to-dollar-cost-average-equity.html

https://mikelipper.blogspot.com/2022/09/if-not-bottom-then-what-weekly-blog-752.html

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

 

 

 

Did someone forward you this blog? 

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Copyright © 2008 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

Begin to Dollar Cost Average the Equity Process - Weekly Blog # 753

 

 

 

Mike Lipper’s Monday Morning Musings

 

Begin to Dollar Cost Average the Equity Process

 

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

    

 

 

Process vs. Point

Many prudent investors have been reducing their equity exposures for some time. They have relied on equity investing as their main tool to meet long-term goals. They have been withdrawing a portion of their investment in stocks for some time. Many have reduced their equity holdings by around 30%. This is easier to do for individuals than institutions, who cannot hold a lot of cash. Institutions move into lower volatility investments, hopefully temporarily.

 

The one thing we know about investing in stocks is that they go up and down occasionally by large amounts. After Fridays close, all three of the main US stock indices and many international stock indices had fallen to lowest prices in at least in a year.

 

There is a feeling that this is an opportunity to reinvest in various stock markets, yet there is also a well-reasoned fear of even deeper bottoms ahead.

 

Long-term conservative investors have in the past recognized that it is much easier to identify a low valuation price region than to pick a particular price re-entry point. I believe I won't be able to identify an absolute bottom point until after it has been reached and probably tested by a subsequent decline that holds above a previous low point.

 

The very best I can do is believe many markets have entered a low-price range. This range can last for an indefinite length of time based on known and unknown factors.

 

The process I will use for account responsibilities and my own accounts, is to divide the maximum equity reinvestment into small purchase buckets, typically 5% to 10% of the total to be invested. That is the easiest part.

 

The two much tougher tasks are the planned frequencies and the individual selection of advisors, funds, and individual stocks.

 

Frequency of Investing

I don't know what the future holds. Everything in life is a gamble from the time we get up in the morning, so we should have a plan. The plan is to lay out the first steps, which will likely be modified in the future.

 

For sake of argument, assume there are three planned frequencies. I will use time periods, but you could also use price levels. For illustration purposes the three frequencies of time are monthly, quarterly, and annually. This is where judgement comes into the process, when to execute into each investment bucket.

 

To my mind, investing monthly assumes the main factors determining long-term results become clear within the next several months. This prediction is largely a price prediction. I don't have confidence in my trading skills to recognize this kind of condition.

 

I believe the bear market we have recently entered will be followed by a structural economic recession. Causes of recessions are usually based on fundamental changes in people's economic and political attitudes, not statistical measures. As these have not yet been identified, I prefer a quarterly reinvestment frequency, which could last two to five years.

 

Based on history, there have been at least two periods of stagflation lasting about ten years. In this scenario, I am prepared to shift my frequency to annual investing. (Sound corporations often use five years or longer for their critical investments)

 

Because I can't accurately predict future prices, I allow them to guide me in executing buy programs. When the price of a targeted investment is 10% below my last entry point, I delay future investment until the next scheduled time. If the price of the target investment drops 25%, I need to take a fresh and probably different view.

 

Current Picture

According to some statisticians, the average bear market decline from a prior peak is 37%. (Numbers and words share the same characteristic of being frequently misleading.)

 

The following table compares Friday's closing price, its decline from the peak, and the remainder of a 37% retrenchment.

 

Index              9/30 close   %Fall from Peak   %Further

DJIA                28,725.51      -21.94%         -16.73%

S&P500               3,585.62      -25.25%         -15.72%

NASDAQ Composite    10,575.62      -33.20%          -4.34%

 

The peak for the DJIA and S&P 500 was 1/04/22. The NASDAQ Composite peak was 11/19/21.

 

For those who can tolerate volatility caused by less liquidity, NASDAQ may give a bigger but more exciting ride.

 

Possible Strategies

Believing we are entering a new market and possibly a new economic phase, the reinvestment program should focus on different thought patterns. If the existing investments are sound, the new investments should hedge a major change, with an anchor windward.

 

Consider real estate, the worst performing sector for at least a year, for a different thought pattern. They have suffered from the work at home syndrome, leaving lots of empty space in offices, city stores, and restaurants. Many real estate entrepreneurs are smart. The bet is that they will convert their space to residential or other productive use. Furthermore, current rising interest rates for mortgages will eventually top out, increasing the cash generation of sound property. This is a bottom fishing candidate, but there are others.

 

Holdings missing from many portfolios are energy securities. The absence of some institutional money may be creating bargains. Too much attention is being paid to the price of oil and other commodities. The key to figuring out energy earnings being neglected by some in the market is the volume of product sold. I am guessing an average price for oil of $50-$70 a barrel. Earnings of many oil companies will be higher than they are today as demand destruction is taking place. This is an example of extrapolation, where the market sets stock prices based on today's conditions and fails to discount future earnings that might be quite different rather than a mere extrapolation. Similar mis­pricing could lead to a good long-term hedge vehicle.

 

Question of the week: How much of your portfolio is in currently invested in unpopular stocks?

 

 

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

https://mikelipper.blogspot.com/2022/09/if-not-bottom-then-what-weekly-blog-752.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? 

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Copyright © 2008 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.