What Do Single Digits Mean? - Weekly Blog # 799

 

Mike Lipper’s Monday Morning Musings

What Do Single Digits Mean?

 

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

 

  

 

Rates of Change vs Available Time

Politicians have an advantage over us mere mortals, they know the exact terminal date of their efforts. That is, the day after their election is all important. Remember, the administrative state is largely dependent on the whims of political leadership, so it helps to focus on them for predictions as to the future. For example, there is increasing evidence that the Federal Reserve is split between those favoring preservation of happy economic feelings and those trying to preserve the economic well-being of the economy. That is how I read the Chairman’s speech from Jackson Hole. The Federal Reserve Chair is attempting to guide a split board toward focusing on the survival of the present economic system rather than generating “bribe money” for the next election. That is why the betting odds suggest we may not see meaningful change until after election night. Supporting this view is Cumberland Advisors headline “Higher, longer? Nope. Lower, soon? Nope. Same for 2 years? Yup!

 

I have come to the same conclusion as David Kotok, Chair of Cumberland Advisors, although I use two very different approaches. Bad history repeats and the actuarial analysis of past results by excluding extremes.

 

The current occasional resident of the White House, Delaware, and other hideouts is a well-known fan of FDR. He has followed the prescription of never letting a problem escape other desired solutions. FDR took advantage of excessively lose credit controls to change a recession into a depression, attempting to override The Constitution. The period resulting from stagflation lasted until the beginning of the US involvement in a World War. FDR was bailed out by the Axis reacting to his actions. (Among them were a ban on oil sales to Japan and the refusal to let a ship full of immigrants trying to escape Hitler’s Europe land in the U.S., among other things.)

 

At one point in the history of Prudential Insurance, the little known but politically powerful executive was the chief actuary. This was supported by their board and also occurred at other surviving insurance companies. The power of the actuary was in setting the rates charged for insurance. During a brief conversation with him, he revealed that he focused on experiences to set rates. (Similar to handicapping horse races and securities analysis.) This was not a mechanical exercise, the actuary decided how events would be weighted and which events would be ignored. In a similar fashion, I look at recent mutual fund performance to project the most likely future performance of the average mutual fund when properly positioned within comparable funds.

 

The Pandemic, Beginning or End of Period

Using an actuarial approach to study mutual fund performance history back to the 1960s. One can roughly classify the period from 1957 through 1968 as expansion, and the next period until the mid-1980s as excessive expansion. This led to another period of stagflation, which was followed by another period of expansion until the second decade of this century. A market decline and a good bull market then followed.

 

The pandemic started in 2019 and lasted largely through 2022, a period of excessive funding to buy votes. It is this history that allows me to use an actuarial approach to downgrade performance history prior to 2020. This is why in the next section I will attempt to guess future mutual fund median performance beginning with the prior peak to current levels.

 

What Will Average Fund Performance Be?

The following analysis is more of a future scouting report than an exact prediction. To be successful I hope it is largely correct in terms of long-term direction and close in terms of actual results. Although it is possibly too conservative. The following table utilizes data from the London Stock Exchange Group, the current publisher of the “Lipper “data.

 

   Change in Total Reinvested Return

               Year   13 Weeks   2/19/20

                to        to       to

Fund Type      --------8/24/23----------  

Large-Cap

Cap Weighted   15.10    4.29      6.76

Median          9.09    2.93      5.00

Difference     -6.01   -1.36     -1.76

 

Mid-Cap

Cap Weighted     7.29    4.57     4.36

Median           7.17    4.30     4.31

Difference      -0.12   -0.27    -0.05

 

Small-Cap

Cap Weighted     6.36    5.02     4.78

Median           7.17    4.15     4.31

Difference      +0.81   -0.87    -0.47

 

 

“Value”

Cap Weighted     5.30    4.72     6.49

Median           7.46    2.99     5.81

Difference      +2.16   -1.73    -0.98

 

“Growth

Cap Weighted    15.07    3.77     5.01

Median           8.76    3.02     3.63

Difference      +6.31   -0.75    -1.38

 

                                        

Analysis

1. There are only two differences over 5% and both relate to the “magnificent seven” performance of seven growth stocks. This is significant, unusual, and unlikely to be repeated in the long-term future. Notice a narrowing difference in the last 13 weeks and a slower rate of change from the last peak.
2. In the current market, larger funds are performing better than the median in their fund class. The difference is probably due to stock selection and possibly lower expenses/transaction costs. However, the heavyweight advantage is within the range of mistakes we increasingly find within society.
3. Our focus is to try to find the middle for portfolio management purposes. I am extremely aware that the “magnificent seven” are up +93% and regional banks are down -37%. As a contrarian looking for long-shots I suspect some regional banks will perform better than some of the “magnificent seven” in the future.
4. One message from the Chairman’s speech at Jackson Hole is the expectation of lower than present overall growth. This would tie with stagflation over the next two years.
5. Long-term, those in lower tax brackets could get hurt by higher inflation caused by labor costs and tariffs hurting consumption.
6. If the NASDAQ Composite continues as the single best indicator of general market direction, its significantly greater number of declining vs rising stocks compared to the S&P 500 is a worry.

Conclusion

September could be a difficult month, which may not improve significantly for two years. Please convince me I am wrong.

 

 

 

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

Mike Lipper's Blog: Some Past Errors Create Future Problems - Weekly Blog # 798

Mike Lipper's Blog: Inputs to Implications - Weekly Blog # 797

Mike Lipper's Blog: Markets Are Time Frame Exchanges - Weekly Blog # 796

 

 

 

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.

 

Some Past Errors Create Future Problems - Weekly Blog # 798

 

Mike Lipper’s Monday Morning Musings

Some Past Errors Create Future Problems

 

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

 

 

 

Employers can't find suitable candidates to hire due to both faulty education and attitudes toward work. This is one of the reasons the US is losing the productivity of labor battle. In at least 16 states a large percentage of students are failing third grade reading tests e.g., 60% failed in Tennessee. (In our machine era, if you can't read instructions, you can't operate various machines.) I suspect that teachers are taught to teach to the test, test scores are used for hiring, and schools are retaining teachers in union jobs.

 

Teachers should be teaching students how to use information to gain knowledge. This is not what is happening today. (A classic example is a problem I had with my late daughter. She drove me crazy with her disability, which caused her to have problems adding a simple column of numbers correctly. So, I changed focus and concentrated instead on how she kept track of spending money. She always had money in the bank and her bills were always paid. In explaining it to me, she said that was easy. She said she was conserving the money by keeping it intact at the bank, while we paid her credit card bill. Thus, she was the best money manager in the family. The key was that she figured out what none of her teachers or aids did. The teachers need to learn to teach life lessons.)

 

The biggest problem with what is being taught is the integrity of our history, which pivots on one word: Tariffs. People don't like paying taxes. Politicians throughout history have given popular reasons why people should make these payments, without focusing on the real reasons. Three examples in US history still hurt us today.

 

The “Boston Tea Party”, staged by American Colonists dressed as Indians, threw the first shipment of taxed British tea into Boston Harbor. The Colonists were protesting the payment of a tax without being represented in the British government. The truth of the matter was that Lord North, an unpopular British Prime Minister, needed to pay for a six-year war with the French to protect the American colonies during “The French-American War”. Lord North and many in England thought that America was costing too much. It was being totally financed by revenues derived from goods purchased from “The Mother Country”. The Tea Party thus became one of the initial political events leading to the American Revolution.

 

The second misappropriation embedded in our history is the Civil War. In this weekend’s Wall Street Journal there is an opinion piece by Jim Webb, a US Marine Officer who served in Vietnam and a Secretary of the Navy. He was also an independent director of a respected Mutual Fund. In the article he commented that there were very few confederates who owned slaves. He also noted that more slave owners fought for the North than the South. Yet it remains a popular belief today that the war was about slavery. In truth, the war was about tariffs. The North wanted high tariffs to protect its manufacturing, while the South wanted low tariffs to aid the British who were major buyers of their’ cotton and were suppliers of cash to the Confederacy.

 

Post Civil War through the Wilson administration, Americans were fed a political diet about slavery. For about the fifty years this was happening, the German General Staff made many trips to study American war battles, particularly battles in the Shenandoah Valley with Stonewall Jackson. The study of these battles played a critical role in both WWI and WWII, particularly in their attacks of the ”low countries”.

 

I also believe the German underground political movements in the US led to delays in the US entering both world wars, despite British efforts. (The US recognized the importance of the war and placed its War College in Pennsylvania, hoping to understand both battles and the infrastructure challenges.)

 

The third misappropriation is still taking place today, with the last two administrations selectively using tariffs for domestic political purposes. These tariffs caused inflation that was importantly paid by low-income people. The current administration is attempting to hurt Republicans by damaging corporate earnings through the restriction of sales, while at the same time trying to raise labor union wages and their contributions.

 

With All This Good News-How to Invest?

Like Ronald Regan, “I won't exploit my opponent’s youth and inexperience”.  Neither party is serving up a long-term leader or a set of policies. Most people can see through their own accounts that there is no great future for them. Around the world young people have lost confidence in the "system".

 

With most equities around the world declining in real terms, one should consider a careful plan to dollar cost average into the markets. The more China suffers, the more attractive long-term investment in China becomes. Foreign car companies will benefit compared to ‘the big 3”, as the UAW forces prices higher.

 

Recognizing my COVID Brain does any of this makes sense.

 

 

 

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

Mike Lipper's Blog: Inputs to Implications - Weekly Blog # 797

Mike Lipper's Blog: Markets Are Time Frame Exchanges - Weekly Blog # 796

Mike Lipper's Blog: Possible Investment Lessons - Weekly Blog # 795

 

 

 

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.

Inputs to Implications - Weekly Blog # 797

 

Mike Lipper’s Monday Morning Musings

Inputs to Implications

 

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

 

The Use of Inputs

There is a known cure for the narcotic attraction of investing. We can’t help but view any inputs as possibly having implications for our investing deliberations. The best we can do is to quickly review the plethora of daily inputs and reject most as unimportant, or alternatively sent to Warren Buffett’s desk basket, labeled “too difficult”. With that thought in mind, the following inputs and possible implications crossed my mind this week. See how many you can reject and how few are important enough to require your further research. Alternatively, you can send me your questions.  The inputs below are in the order they reached my consciousness, not of their level of importance.

 

Inputs & Implications of August 13^th week

1.  The Value of Competition: On the surface regulators see vigorous competition as the best way to achieve the lowest price for consumers and the highest wages for workers. For the long-run sake of society, the primary value of appropriate competition is the evolvement of a sector that can sustain itself and develop useful new products and services.

 

Implications: Placing a priority on competitive prices, wages, profitability, research, and national security, will likely hurt other players in the industry. No single force seems bright enough to allow for the enthronement as a Czar to oversee the industry. History suggests that mandatory leadership does not work. The best results are achieved when those involved compete against each other and let the marketplace decide the outcome.

 

2.  Input of what is the market is saying. Most of the time there is not a single market and therefore a single market index is not that important. In an overt simplification of markets and indices, you can use the following generalization to see what each of the markets is saying.

 

The Dow Jones Industrial Average (DJIA) is the most followed by individuals getting their market views from local media and politicians. The importance of the index is its reflection of votes, not dollars.

 

The Standard & Poor’s 500 is the single most important index for investment institutions and corporate managers. The latter group is often incentivized by its own stock or industry relative to the index. Institutional investors are conscious of the flows into and out of their portfolios relative to the index. The SPX is often used as a forerunner of employment trends.

 

The NASDAQ Composite is useful in measuring the level of speculation in the market, as it generally tracks the performance of younger and somewhat smaller companies. Most speculations are based on the belief that the future of the stocks within the index are improving. That is why the index has been more volatile in recent years, with up and down tends moving faster than the other indices.

 

When discussing “the market” with someone, the first market measure they mention tells me what kind of investor they are. People see “the market” differently, and while the main elements of the market move at different rates, a good bit of the time they mostly move in the same direction.

 

3.  “Pro Inflation” input. Very few people are publicly in favor of rising prices, although their specific actions push prices higher. Truckers, autoworkers, pilots, and other Teamster’s unions are among those pushing prices higher.

 

Considering the low productivity of businesses and non-profits, a meaningful wage increase will lead to higher prices and generally worse services. The current administration’s restrictions on energy production, onshoring, the mandating of employment practices and union membership, add to inflated prices at the consumer level. The implications are that the movement of interest rates will not be enough to sufficiently bring down long-term inflation.

 

4.  Standard & Poor’s is no longer using ESG ratings in assigning credit ratings. (I wonder whether they should actually include it as a negative, reflecting the negative consequences of a company that puts social spending ahead of its obligation to bond holders, stockholders, and fellow local and national taxpayers.)

 

5.  China’s export and import numbers have declined meaningfully. Some of it is due to US government policies. Is this wise from a purely US standpoint? (It could be as disastrous as FDR’s prohibition on US companies selling petroleum to Japan in 1933, after they were precluded from the carving up of the German Asian colonies.) China’s imports of US goods are paid for from their export earnings. There is also a risk of China dumping products on the markets of our “European allies”. Implications are that the US is reverting to isolationist policies, following a war that is the preamble to the next war.

 

6.  Input: More than half of young Arabs in North Africa and the Levant are considering leaving their homes in search of better jobs. Implications: This desire is similar to those in China and many youths in the US who are also in search of well-paying jobs. This appears to be a global demographic urge. Arabs are part of this urge even though one of the stock market indices produced by Dow Jones Standard & Poor’s is labeled Islamic Technology.

 

The youths want good jobs and employers want good workers. I wonder whether it’s a global problem concerning the lack of sufficient rigor in their home, schools, or even religion? Discipline, respect for others, and following rules could be a global issue that makes future progress more difficult.

 

7.  Input- the stock markets appear to be having a bout of complacency, with the VIX declining 14.84 this week vs 17.10 the prior week, and 19.53 a year ago. We used to think of the 30 level as normal. The bond and credit markets seem concerned about risk in the near term, with the continued inversion of higher Treasury yields for 2 years vs ten or thirty years. All of them are in the 4% range.

  

Implications: Permanently higher interest rates with the level of risk about equal through the whole long period. As a student of history, I have my doubts. I suspect too many investors are focused on current conditions extrapolated to the indefinite future.

 

8.  Every large country regularly prepares for future offensive battles and defensive wars. China follows this pattern. Two indications: A Chinese national serving in the US Navy on an armed amphibious ship was caught selling photographs of critical equipment to a Chinese agent. (As a USMC Combat Cargo Officer, I served on an armed troop amphibious ship. I believe that if China attempts an opposed amphibious landing on Taiwan, it will need a number of such ships and an experienced crew, both on the ship and on landing craft.

The US has two army type forces, the regular army, and the reserves/National Guard. The Chinese have a similar set-up, with their Militia normally assigned defensive tasks. They are however receiving training in the use of drones and other more aggressive functions. This suggests the main army will have other responsibilities or will need replacements for some of their people that are wounded or killed.

 

9.  How different is the level of investment performance compared to that in the past? One thing I do each week is to look at the performance of the 25 largest long-term mutual funds. Going back to 1926 the S&P 500 grew about +9% per annum, without any deductions for expenses and transaction costs. How does that compare to fund performance?

Of the only four funds which gained between +10.08 % and +14.33%, three were passive and one active. Three fixed income funds were slightly negative. The remaining funds gained between +6.41% for a value-oriented fund and +8.66% for a large-cap growth fund. The bulk of large equity managers produced returns in the mid +7% range, which was somewhat behind the passive index before adjustments. The implication of this analysis is that it may be appropriate to use +7% as a goal for large-cap institutional money.

 

Working Conclusion

Stock Market investors are not incentivized to change their portfolios, while fixed income investors attempt to price in credit and market risks.

 

How many of the implications are real and/or likely?

The following table may help you focus.

Indication            Implication            Accurate            Important for investment  

1.    Competition

2.    Market indices

3.    Pro inflation

4.    ESG, positive or negative

5.    China

6.    Attitudes of youth

7.    Complacency & worry

8.    Preparing for war

9.    Long-term equity expectations

I'd be delighted to learn your views.  Please let me know.

  

 

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

Mike Lipper's Blog: Markets Are Time Frame Exchanges - Weekly Blog # 796

Mike Lipper's Blog: Possible Investment Lessons - Weekly Blog # 795

Mike Lipper's Blog: Cross Winds - Weekly Blog # 794

 

 

 

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.

Markets Are Time Frame Exchanges - Weekly Blog # 796

 

Mike Lipper’s Monday Morning Musings

Markets Are Time Frame Exchanges

  

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

 

 

 

Who is in Today’s Crowd

The bulk of investors are not currently active. August is normally a low volume month, but it appears we are not in normal times. There appears to be less conviction as to where we are going. A reasonable bet is that the majority of opinions regarding future direction are wrong.

 

This week we heard two opinions which the media suggested were in contrast with one another. Fitch lowered its credit rating on US Treasuries by one notch to AA+ from AAA, while Jaime Dimon stated that no large country has a stronger credit condition. Actually, they are probably both correct, the difference is in their function. The Chairman and President of JP Morgan Chase was reassuring depositors that the US government was currently the safest place to invest. Fitch as a credit rating forecaster, was suggesting future political battles within the US could delay the promptness of the US government in making payments on all its obligations. Both could be correct.

 

Jamie Dimon is probably correct that US government payment dates will not currently be violated. (This excludes delays in payments on various government contracts, which are not funded obligations.) Fitch raises the question as to when the political process in the future could lead to some delays. These are important concerns, but it is not the total picture as far as investors are concerned. 

 

A funder of the US government who will be repaid in devalued dollars due to high levels of inflation. An added concern is the foreign exchange value of the US dollar in a world that is increasingly measured in other currencies. Both geopolitical and economic factors may make the dollar worth less when purchasing essential items from overseas providers. (Energy, clothing, critical medical resources, etc.)

 

Looking beyond the next few years the picture looks less promising due to aging populations in the US and around the world. Both the US government and private sector are failing to build up the reserves necessary to pay retirees likely to have health issues. Historically, the next generation utilizes their working years to pay for their own retirement and the care of their seniors. That is not happening now. Many workers currently spend all they earn and do not focus on long-tern cash generation.

 

Other Disturbing News of the Week

1.  The current President looks to FDR as a great, if not the greatest, president. FDR believed his greatest achievement was the National Recovery Act of 1933 requiring competitors to meet and agree to wage rates for their employees. The higher the better. The act was ruled unconstitutional by the Supreme Court.

2.  The UAW is demanding the “Big 3” give their workers a 40% increase. (This is the same union that forced the US auto companies and their suppliers to raise wages, leading to an increase in foreign manufactured car imports and a decline in US auto exports.

3.  One investment adviser called to my attention an article by Bob Kirby, the great salesman from the Capital Group. His article, written in 1975, showed how each generation fails to learn from the past. Bob earned enough during his lifetime to endow 5 scholarships at leading universities, hoping to correct this situation. Caltech was a recipient of one of these Robert Kirby scholarships.

4.  Xi, the Chinese Leader, measures national success in terms of technical self-sufficiency.

5.  For the past week only 2 of the 31 Dow Jones-Standard & Poor’s market indices were up, these were select micro and internet services.

6.  Only 5 of the 72 price indices published by the WSJ each Saturday were up this week. Three were energy and two were currencies. Wheat and corn were the two biggest losers.

7.  A US Navy Petty Officer was caught supplying detailed photographs of an attack amphibious ship to a Chinese agent. (One of the many difficulties facing an amphibious landing on Taiwan is the lack of amphibious ships and their training. Over 60 years ago I served on such a ship as a USMC Combat Cargo Officer.)

8.  Last week, volume in NYSE stocks declined 59% vs. 62% for the NASDAQ.

9.  Major advertising agencies are cutting their estimates for the rest of this year because their clients are cutting budgets.

 

Conclusions

The Fitch credit rate cut was not the only bearish news that caught my attention last week. The comparisons with the FDR led Depression is a bit unnerving. What is clear is that while the bulk of the US focuses on the general movement of the dollar, many in Washington are focused on the probability of votes, particularly at the top of the tickets.

 

What are you seeing and believing?

 

 

 

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

Mike Lipper's Blog: Possible Investment Lessons - Weekly Blog # 795

Mike Lipper's Blog: Cross Winds - Weekly Blog # 794

Mike Lipper's Blog: Two Cycles Are Worth Watching - Weekly Blog # 793

 

 

 

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.