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Mike Lipper’s Monday Morning Musings

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Week in Conflict Leads to Buy List - Weekly blog # 764

Mike Lipper’s Monday Morning Musings

Week in Conflict Leads to Buy List

 

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

            

 

 

Trading Didn’t Tell Us Much 

Over-simplification: Buyers largely believe that inflation is the sole problem facing the market and the Federal Reserve will take care of it by managing short-term interest rates. As the stock market went up the first two days of the week, more shares transacted at rising prices. 

 

The next two days saw prices decline in reaction to a greater than expected fall in November retail sales. Department stores led with a more than -2.5% decline compared to an overall average decline of -0.6%, vs. an estimated decline of -0.2%. (Visits to the high-end The Mall at Short Hills in early and mid-December saw a lack of salespeople, incomplete stock, and vacant stores.) There is a second group of investors, some of which were trading and many more not. I call them Realists. 

 

Friday’s transactions were partially misleading in that over $4 trillion dollars’ worth of options came due. Options users often hedge individual securities, exchange-traded funds, and other derivatives. On Friday both the NYSE and NASDAQ traded over 5 million shares on the downside, vs. a total transaction count of 5.4 million shares on the NYSE and 5.5 million shares on the NASDAQ. (Remember, about 40% more shares were traded off the exchanges.)  1.7 million and 2.4 million shares were traded on the upside. (Thus, I am not sure how to interpret these actions, other than them giving us a clue on the size of the speculative market.)  

 

Although the believers will hopefully be right, it does not appear it will be soon. Economists have created an index of leading indicators which are still going down by about 1% per month. The believers, particularly those that are Washington oriented, focus on national numbers. They do this because it leads them to policies where they can harvest votes. The realists are more attuned to measures that track the wealth of the country and the world. This year the aggregate wealth on main street has been rising due to an inflated sample of real estate prices rising faster than public portfolio values have been declining. These people recognize their good fortune but worry about inflation and the decreasing purchase value of their currency. 

 

A leading retail-oriented broker indicated their clients have been buying mostly corporate/municipal bonds and commodities, while selling declining US government bonds. Thirty-year bonds have fallen 35%, the worst in over a century. (Never have they fallen 3 years in a row.) 

 

Commodities are finishing the year as the best asset class for a second consecutive year. Commodities are going up in price because of actual and perceived shortages, both at the industrial level and to a lesser extent at the food level. When demand drops for industrial goods in a dampening economy, some commodity prices will also drop. This is exactly what OPEC+ fears, a fall in demand.) 

 

Brokers also see a sharp increase in the purchase of tax-exempt bonds. Many of these bonds are backed by expected state and local income taxes. These revenues will likely drop when individual and corporate income drops and won’t be meaningfully offset by rising rates for political reasons.

 

Thus, in an attempt to preserve investor wealth and purchasing power, a major portion of their wealth may be exposed to rising interest rates and a decline in purchasing power. After which rates could fall if “The Fed” reduces them. It is exactly the reason I am suggesting long-term prudent investors begin investing a portion of their assets in something that was previously mostly attractive to seniors. 

 

Tactical Reserve Preparation 

This time it’s different in that capital is being temporarily retrieved from risk assets. (The length of time out of the market will be determined by changing investment and personal conditions.) Since none of us know what the future will bring, we should utilize some of our money to defend against the possibility of stagflation, which could last ten years or more. This has happened twice in the last century.  

 

The tactical reserve is best structured by buckets. One bucket being long-term oriented and another short-term. The latter would be kept in locally deposited savings accounts, money market funds, and 2 year or shorter US Treasury paper.  

 

The larger portion, or perhaps the total of the tactical reserves should be invested in Equity Income stocks, an old asset class that is slowly becoming available. For many years these investments were difficult to find due to low interest rate yields. 

 

Currently, 2-year US Treasuries are yielding 4%. In this weekend’s WSJ I was pleased to find 48 stocks out of list of the 1000 largest equities yielding above that number. My filter was common stocks yielding between 4.0 and 5.99% whose price/earnings ratio was below 15x. Every investment has risks and those with yields of 6% or more are believed by the market to have some capital risk. Also, stocks with a P/E above 15 may not have earnings approximately equal to twice the current dividend. Most of these companies regularly raise the dividend at least as much as inflation. Another helpful characteristic is a significant number of shares being held by a family or other interested parties, like some pensions, endowments, and income oriented mutual funds. 

 

While there is some portfolio diversification in the list of 48, it is not as diversified as the broad-based market indices. The largest common denominator on the list is financial companies, with a heavy collection of domestic and foreign banks, particularly Canadian. The list includes Citigroup. Real estate and utilities are also prominent. I was pleasantly surprised to see 3 fund management company stocks I own in order to participate in a growing financial services business. Furthermore, there were names of major holdings in the investment companies I own. I also found some names of stocks I should investigate for inclusion in my tactical reserve or other portfolios. 

At this point the task shifts from security selection to portfolio construction and ongoing management. As we are building a tactical reserve, we need to avoid unnecessary exposure to losses. The first rule is to reduce risks by diversification. The best way to start is to have a beginning portfolio of at least five holdings, which hopefully will grow to ten distinct holdings in time. Pick your holdings from each of the sectors - Domestic banks, foreign banks), non-bank financials, life insurance, property owners, energy providers and servicers, industrial producers of needed products, and utilities. (Some pay dividends in dollars while making their money in different currencies, including commodity aided currencies like the Canadian dollar.) Be careful to limit the maximum single holding to twenty percent of this account.  

 

When operating the account, small cash distributions should be transferred to the cash account. If the prices of the holdings drop ten percent more than the market, stop buying. If prices fall twenty percent or more, consider selling half or all the holding. 

 

Remember, these operating procedures are suggested for the tactical reserve account. A different set of rules and procedures would be more appropriate for accounts having different target dates for payments. The other important thing to remember is that the quicker an investor learns humility, the bigger the ultimate return.    

 

For long-term subscribers who will share their intended use of the list with me, I will make the list available to them.   

 

 

 

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

Mike Lipper’s Blog: What does your 4.0 Profile Tell You? – Weekly Blog # 763

Mike Lipper’s Blog: Week Divided: Believers vs Investors – Weekly Blog # 762

Mike Lipper’s Blog: This Was The Week That Wasn’t – Weekly Blog # 761

 

 

 

 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 

Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

  

What does your 4.0 Profile Tell You? - Weekly Blog # 763

 

Mike Lipper’s Monday Morning Musings

What does your 4.0 Profile Tell You?

 

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

            

 

 

When one sees a mark of 4.0 it usually signifies academic perfection. As the investment game is different from other realities, so too are our measurements and goals. As much as we try, none of us has established a long-term investment record where each investment in each period produces a satisfactory performance record. We need a different type of measure to produce a learning device to improve performance.

 

These thoughts led to four inputs for investment action. After listing the four, it became clear that each label ends in an “o”. Recognition of these inputs might help sum up the importance we attach to each and explain what type of an investor we are and the performance we generate.

 

The four main inputs are:

• Macro
• Micro
• Politico
• Psycho

 

Macro is the generalized investment thinking of most people. As discussed in recent blogs, most pundits and their dedicated investors are in one of two camps. They either believe or don’t believe that investment gains are being held back by inflation, with changes in the level of interest rates the only way to cure the problem. The second group believes that current performance is due to broader structural problems and basic imbalances. Among these problems and imbalances are the lack of constructive leadership throughout society, including politics, education, the non-profit sector, and businesses.

 

As a life-long student of investment performance I suggest that it is extremely rare that the current generally accepted macro view will correctly predict the future.

 

Micro inputs can be translated into “God is in the details”. Some of these details are derived from audited statements where there are very few mathematical errors. (Other than measuring the wrong things in the wrong way.) As an investor I value incomplete observations of changing elements more. Such as changing of the number of workers doing different tasks, changing the number of customers making spending or selection decisions, or the number of customers consuming specific goods and services. My interest is not the raw numbers themselves, but their volatility and where they fall in the range of past actions. The key is to recognize changes in people’s behavior and try to guess their motivations.

 

Politico also consists of two parts, what is likely to happen and what one hopes will happen. The closer the two are, the less likely the result will occur. Interest at various levels may also influence perception, be it international, national, local, industry, organization, or family. As a practical matter, the interest of greatest impact will likely be the reverse of the order above.

 

Psycho deals with our optimism and pessimism, including the confidence in our personal ability and willingness to make meaningful change.

 

Applying Inputs

As with any composite of inputs, one can treat each equally or weight them appropriately. For example, I might weight macro 2, micro 4, politico 3, and psycho 1.

 

In this situation it would be difficult to select investments that didn’t have strong micro attributes. Politico would also be an important consideration. Both macro and psycho would only be important if micro and politico were not individually selected. Under these conditions I would be unlikely to act on macro influences but would probably make moves if micro or perhaps politico exerted strong directional inputs. In general, I would need more evidence to make major changes to my portfolio based on macro events. (A second level adjustment could be applied to the strength of my belief in each. For example, 90% for micro and 10% for psycho.)

 

There are many other selection processes. Some work better than others under different circumstances. The value of understanding one’s selection biases is to direct focus to what is important.

 

Clues of the Week

Each journey starts with a first step, as does each long-term investment record. Our problem is that we don’t know which week is the beginning week.  Additionally, no long-term record has each week moving in lockstep with the long-term record. That is why we search for clues each week. As with many investigations we look at many clues, some of which will be wrong. I summarize in these blogs the most likely.

 

In terms of forward motion there wasn’t much this week, but it is possible the ratios of new high/new lows, volumes, leading/lagging sectors, and news from beyond the stock markets could be instructive.

1. On the NYSE, new lows were larger than new highs each day. (Only true for 3 days on the NASDAQ.)
2. More shares were sold at declining prices than rising prices in 4 out of 5 days, with weekly volume -2.6% for the NYSE and -6.1% for the NASDAQ compared to the prior year.
3. Of 32 S&P Indices, only the Asian Titans 50 rose for the week. The prior leaders, energy and financials, turned down, while healthcare and tech rose.
4. Personal Savings were +2.3% vs +7.3% a year ago. Steel capacity usage was 73% vs 82% a year ago. A Jeep Cherokee factory to indefinitely lay-off workers in February.

 

Despite the “happy-talk” of inflation peaking and interest rate hikes slowing, investors and consumers are not buying a turnaround.

 

Incomplete Strategy Labels

Pundits and marketeers prefer short, snappy labels for various portfolio strategies. These are typically one-sided as they only describe the purchase side, not the other strategies excluded. Below are some examples of more instructive labels:

• S&P 500 Index - Market-cap or equally weighted
• “Go to Cash”- Freeze the rest of portfolio
• All investors - Traders, investors, taxable or tax exempt (deferred)
• High/low P/E without identifying the date - Price is current when earnings lag. (I prefer to use operating or net cash flow after debt payments.)
• High/low volatility without identifying the period of volitivity -Intra-day, daily, weekly, monthly, yearly.

 

Readers may have their own examples of mis-labeling.

 

 

 

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

Mike Lipper's Blog: Week Divided: Believers vs Investors - Weekly Blog # 762

Mike Lipper's Blog: This Was The Week That Wasn’t - Weekly Blog # 761

Mike Lipper's Blog: Trends: Deflation, Stagflation, or Asian? - Weekly Blog # 760

 

 

 

 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.

  

Week Divided: Believers vs Investors - Weekly Blog # 762

 

Mike Lipper’s Monday Morning Musings

Week Divided: Believers vs Investors

 

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

            

             

 

You Are What You Read

Early last week US stock market indices rose gently. The pundits’ view inflation as having peaked globally, with “factory gate and commodity prices, shipping rates and inflation expectations have begun to subside”. The Federal Reserve is expected to reduce the acceleration of interest rates shortly.

 

Meanwhile, Washington was simultaneously trying to avoid a national rail strike by imposing additional costs on the railroads. These costs would be imposed on all using freight delivered by rail and would encourage others to raise labor demands, which if successful would lead to higher prices.

 

If there is going to be a recession, believers think it will be short-lived and shallow.

 

What causes Inflation?

Inflation is created by demand exceeding available supply. Rarely it is caused by free markets working on their own.

 

Our current inflation started with the last two Presidents who for political reasons flooded the economy with grants. These grants were beyond the immediate need of the unfortunate who required help. This approach is hardly new, it was implemented in ancient Greece and Rome and is still practiced in numerous countries today. These grants avoid the laws prohibiting bribery but encourage dependence on elected officials or parties.

 

On day one the current administration went even further by restricting supply. They first killed the pipelines then implemented regulations forcing providers to raise prices to cover government mandated expenses.

 

To avoid taking responsibility for inflation the Government turned to the Fed, utilizing it as a hammer to beat down the rate of inflation. The Fed was like a person given only a hammer to build a home, they only had the ability to use interest rates to curtail demand.

 

Business leaders eventually recognized that curtailed demand would likely lead to lower revenues and consequently started to cut back on their current and future labor force.

 

One example of this is the broker/dealer community. While an index of publicly traded broker/dealers is close to its all-time high, leading firms are laying people off. Evidenced of this can be seen in a recent statement by the CEO of Morgan Stanley. (Stock is held in our financial services fund)

 

This message is being read and acted upon. ADP in their latest survey indicated that private sector employment is at the lowest it has seen in two years. (Also held in our financial services private fund)

 

What Does the Data Say?

While both concurrent and lagging indicators are slowly rising, the leading indicator is dropping.

 

IBES, via Refinitiv, is predicting S&P 500 net income will show a -3.6% decline in the fourth quarter. The first three quarters in 2023 will be +0.7%, -0.9%, and +3.5%, respectively.

 

Bank of America’s reminds us that December will most likely be an up month. Nevertheless, they predict a global recession, the reopening of China, and re-shoring in Europe and the US in 2023.

 

Two Other Views

Market indices are being influenced by their leading components. The Dow Jones Industrial Average (DJIA) is the best performing index. It is both closest to its former high and has the biggest gain from its most recent low. The DJIA performance has been driven by its goods producing and selling companies, which are not normally its best investments.

 

The Standard & Poor’s composite index is market capitalization weighted. Something that is most useful to investment institutions managing large single portfolios, deemed to be high quality companies.

 

The NASDAQ Composite is now made up of companies that for one reason or another don’t list on the “big board”. In terms of the number of shares traded it is the largest stock exchange in the world, followed by the London Stock Exchange. The New York Stock Exchange (NYSE) is third on the list, but probably has more capital listed than others.

 

Nevertheless, the NASDAQ often leads the US and many other exchanges in terms of performance. Perhaps it is due to the fact that it has younger and faster growing companies. (We also own its shares in our financial services fund.)

 

I pay particular attention to NASDAQ performance compared to the NYSE. I noted with some concern that the NYSE had 89 stocks achieving a new high and 44 a new low on Friday. The NASDAQ had 97 new highs and 128 new lows. Since the NASDAQ has more listed companies, I am not disturbed by the number of new highs. Unless this is an aberration, the sharp difference in the number of new lows relative to the number of new highs could be a warning. I will follow carefully

 

One of the most thoughtful large mutual fund management companies is the Capital Group in Los Angeles. It has been investing beyond US borders for many years and summed up why in the five points listed below:

1. International investing is about companies not countries.
2. A strong US dollar won’t last forever. (Dropping recently)
3. Dividend opportunities are greater outside the US
4. New economy depends on old industries
5. Not all of the best stocks are in the US

 

This is why I believe it is prudent to have some money invested beyond US borders.  

 

 

 

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

Mike Lipper's Blog: This Was The Week That Wasn’t - Weekly Blog # 761

Mike Lipper's Blog: Trends: Deflation, Stagflation, or Asian? - Weekly Blog # 760

Mike Lipper's Blog: An Informative Week with Many Questions - Weekly Blog # 759

 

 

 

 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.