Mike
Lipper’s Monday Morning Musings
Cross Winds
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Frustrations
Geometric projections
frustrate investors and others. Unfortunately, in life and business we are often
taught that we will be rewarded if we follow straight lines. In our simplistic
minds we translate that into a simple equation with a predictable outcome.
The truth of the matter
is that nothing is really that simple. Almost everything comes with
counter-indications identifying obstacles or hurdles. This week is a classic
example of cross winds presenting different tracks from current popular views. As
both a student at heart and an investment advisor to clients and my family, I
view these cross winds as a learning opportunity.
Disappointing Earnings
and Higher Stock Prices
(All of the stocks
mentioned are personally owned and are not necessarily recommended for others.)
Two investment industry
leaders, Goldman Sachs and T. Rowe Price, are going through an extended period
of changing their customer mix and critical management people. In both cases,
after announcing below general earnings estimates, their stock prices rose. In
a somewhat similar fashion Discover Financial fell 18% and Interpublic declined
12% after shortfalls in their basic businesses, but after a one-day decline
their stock prices rose.
When explaining these
occurrences to my Good Wife, she mentioned that some investors were taking the
price decline as an opportunity, feeling the identified problem was being
remediated.
Experts Being Wrong
There are a bunch of
classically trained, high-quality growth investors who for some time have been invested
in segments of the largest players with disappointing results. This includes a
number of the largest healthcare providers. Even after trimming some of their
positions, these managers still on average have 21% more invested in the sector
than the sector share of the S&P 500. While a number of these companies
have potentially exciting developments in their R&D pipeline, which if
approved should more than offset the patent cliff of their existing products or
services. They are facing talked about pressure from the government to get
prices lower as they expand their market. The rising economic growth of
populations in Asia and Africa are opportunities for more growth.
Institutional investors who manage portfolios to meet long-term funding needs are particularly well suited for the ten to twenty-year cycle of taking an ill-defined idea to excess cash generation through dividends. Some individuals with long-term retirement needs or those who are looking to pass wealth onto heirs and charities over time are also well suited. Quite possibly more long-term healthcare financing should be in non-publicly traded securities.
Efforts to create new
restrictions on mergers and acquisitions by this administration, like the FTC and
Justice Department, are among the new risks facing large Pharma companies. These
restrictions will raise the cost of healthcare and slow US development of new
products and services. (This could be more destructive than a new land war.)
Messages from the Market
- A Wall Street Journal survey of economists found 3 optimistic and 5 pessimistic.
- The latest data on ETF flows showed domestic equity redemptions, with net purchases of international and tech funds.
- After the market closed on Friday, I noticed on a list of stocks that 15 had showed gains over closing prices, while 7 showed losses. (This suggests that disclosures of important information should perhaps be done during trading hours.)
- The American Association of Individual Investors (AAII) conducts a sample survey of its member’s estimates of the market 6 months into the future. Market analysts view these readings as contrarian signals. On balance, I believe the public is often more correct than the professionals. However, there is good evidence the public is late in identifying critical turning points. I view a reading of over 50% or below 20% as abnormal for bullish or bearish readings. This week’s survey showed 51.4% anticipating higher markets. Up from 41.0% the prior week, a cautionary sign.
Sometimes it is Better to
be Lucky than Smart
I have twice recognized
being lucky. In both cases I invested in a fund which for non-investment
reasons decided to liquidate by distributing its portfolio to shareholders. It
led to my first ownership of Apple at a very attractive price. More recently, a
portfolio was transferred to me from a retiring, very sound, global equity
income portfolio. One of its holdings was a company I had admired for a long
time but had never purchased. I am now the owner of shares of Taiwan
Semiconductor Manufacturing Company (TSMC) at an attractive price. The stock
price recently dropped when the company announced its earnings would drop by 10%.
The company also said its new Arizona plant would be delayed until 2025 due to its
inability to get enough qualified labor. (They did not refute their expectation
that semiconductors for artificial intelligence applications would grow at a
compound growth rate of 50% over the next five years.) My purpose in mentioning
these two unexpected gifts is to illustrate that if you are in the game of
investing, some good and bad things can happen.
Yields on bonds are often
good indicators of future stock market direction. Barron’s has 2 yield measures
for high and medium grade bonds. The yield spread between these two indicators
has narrowed from 97 basis points a year ago to 25 basis points today. This is mostly
attributable to high-grade yields going up 102 basis points vs. 34 for the
median grade. Since many capital spending plans are priced off the high-grade
market, lower bond prices are a concern.
China
- Only 20% of institutional managers expect China’s GDP to accelerate, compared to an earlier expectation of 80% looking for China to expand.
- While the new president of the PBOC was trained in the west, the final decision on anything important governing the Yuan will likely be done by Chairman Xi.
- Morgan Stanley has moved 200 people from the Mainland to Singapore to protect its internal data.
- In the first half of 2023 Chinese box office revenues for American films was $592 million compared $1.9 billion in 2019. Implications?
- James Mackintosh of the WSJ noted that Chinese securities prices are now at the same level they were 10 years ago.
- For the week ended Thursday the best mutual fund sector was Financial Services Funds +3.89%. The worst was China Regional Funds -3.25%. (At least for this week, hedging my financial services holdings by owning some funds invested in China worked.)
Next Portfolio Steps?
You don’t need to
know how to make a watch to tell the time.
Trying this exercise below gives the reader the chance to see the
thinking behind some of the analysis. Each of the items mentioned could impact
an investor’s investment actions. One way to determine whether they should is
to assign a value to each item between 1 and 20 and convert that number into
percentages between 5% and 20%. Disregard any assigned factor below 5%. (We are
not that perceptive.) Add up the total remaining. Quite possibly the total will
be over 100%. Take the total and divide it by 100, e.g., 100/150 = .67%. Reduce
the value of each item by 67% and read the total which should be close to 100.
If that is the case.
Ignore any reset value below 5%. What you’ll probably wind up with is some
factors being the opposite of others. That is okay because it suggests an
internal hedge, which is appropriate in many cases where there is a lack of full
confidence in our views.
Treat the effort as
an exercise and it may well open up other ways of seeing how you invest and
could lead to useful changes. Please let me know how it works for you.
Mike
Lipper's Blog: Two Cycles Are Worth Watching - Weekly Blog # 793
Mike Lipper's Blog: Retro, Forward,
& Cycles - Weekly Blog # 792
Mike Lipper's Blog: Gravitational
Waves & Investing - Weekly Blog # 791
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 – 2023
Michael Lipper, CFA
All rights reserved.
Contact author for
limited redistribution permission.
Posts
No comments:
Post a Comment