Indicators as Future Guides - Weekly Blog # 808

 

Mike Lipper’s Monday Morning Musings

 

Indicators as Future Guides

 

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

 

 

Since before humans began recording history, they looked to the past to predict the future, believing the Powers (God or Gods) would repeat.  This belief was fortified by the introduction of numbers which repeated. Thus, as numbers were collected to create past performance records, humans arranged them into groups of indicators to predict the future.

The problem with this approach is that we treated the collected numbers as indictive of the future. Numbers that are an incomplete historic record are an abstraction of the events. Missing from the scores are two critical elements.

1. What else was simultaneously happening was rarely recorded within the same or relevant time period.
2. There was little if any documented notation regarding motivations. So, we do not know why certain things were done.

 

Despite these drawbacks we enshrine indicators as the proximate causes of people’s actions. This is particularly true in using historical actions to settle contemporaneous actions in legal disputes, e.g. The Prudent Person rule.

 

(Commercially, I am happy with the reliance on past data, for it encouraged the desirability of past mutual fund performance, fee, and expense data. However, my stack of losing racetrack tickets demonstrates that the past is not the absolute prolog for the future.)

 

Nevertheless, in the absence of “divining rods” indicators are useful devices in looking for future guidance, or for a good crutch.  To reduce my reliance on placing too much importance on my investment thinking, I examen numerous indicators, and where possible what else was happening at the time, trying to ascertain motivation. From my handicapping experience, I am aware that popular choices pay off less than choices that are less popular.

 

The following, in no specific order, are some indicators I look at each week and my reactions to them.

 

Transaction Volume Location

This week on the NYSE, 77% of traded shares declined, with only 59% declining on the NASDAQ. (I believe there is currently more transaction volume by both the public and less experienced managers on the NYSE. Note, NASDAQ prices gained more this year and thus have more to give back if we are in a general decline.)

 

Corporate Announcements

Korn Ferry*, a major employee sourcing firm announced that it was dismissing 8% of its work force. (If their corporate clients were planning to hire soon, they wouldn’t be letting people go. ADP* also forecast a      decline in customer’s payrolls, which hurt their stock. Additionally, UPS predicted lower shipment volume coming from China, suggesting retail merchants are cutting back.

(* Owned in personal or managed accounts, not recommended.)

 

Congressional Indicators

A split Congress is expected to last at least through the next election. With very little legislation enacted, Democrat inflationary actions and Republican deficit cuts are unlikely to materialize.

 

Future Investment Performance

Double digit equity performance is not normal, and triple digit performance is even less so. The better performing ten-year university records are in the high single digits. 12% of American taxpayers had a net worth of over $1 million net, with the bulk of their assets in securities and their homes. Current private equity and debt investing is on average producing low single digit returns. Private investments are showing signs of aging, relying on raising new money from the public and newly managed accounts that were formally paid commissions. New and less experienced managers are entering the business.

 

Current Prices

The weekend WSJ publishes the price moves of securities indices, currencies, commodities, and ETFs. I track the % up vs. down to get an overall feel for the 72 investments. This past week only a 1/3^rd were up. Of interest were the top/bottom two, Nymex Natural Gas +9.14% and Lean Hogs +6.75% vs. -6.29% for the S&P 500 Communications and -6.19% for the Dow Jones Transportation. (This suggests to me that these extreme prices are the result of sudden news items. With 3 of the 4 extremes in the +/- 6% range, it suggests this is a normal move for surprises.

 

Working Conclusions

1. The general primary trend is moving down.
2. In a bear market there are sudden rallies.
3. Long-term investors should look to buy opportunities that will be different than past winners over the next ten years, or possibly five. There will be material restructuring of society, the economy, and the leadership of many political, corporate, education, and non-profit groups.

 

Share your thinking with us.

 

 

 

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Mike Lipper's Blog: Changing Steps - Weekly Blog # 807

Mike Lipper's Blog: Change Expected - Weekly Blog # 806

Mike Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805

 

 

 

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Changing Steps - Weekly Blog # 807

 

Mike Lipper’s Monday Morning Musings

 

Changing Steps

 

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

 

 

Reason for Cycles

Throughout human and geological/climatic history one can detect repeated periods of similar, but not identical elements. These periods are often immediately opposite prior cycles. Humans tend to be coin flippers. On the one side is greed and on the other is fear. Both are motivated by a desire for qualities we don’t have in sufficient quantities, the assurance of safety from others. The longer we suffer from the perceived deficit, the greater the perceived need.

 

In the natural world dominant forces are eventually met by counter forces, which brings them back to some form of equilibrium. Both written and geological history record frequent but irregular cycles. History records the existence of cycles, but not the motivations that created them. Literature about historic events tries to fill this gap, although it is disadvantaged by those hoping to curry favor with the winners and their write ups.

 

Futurists

Many people are content to take one day at a time and not focus on the future. Those of us responsible for doing something today for future beneficiaries recognize that we will be judged by the conditions that exist when beneficiaries get “their” assets. We are thus cursed by future perceptions of how we deal with investments today.

 

Where Are We?

Many of us have traveled with children or other impatient people who repeatedly ask, where are we? Or worse, when will we get there? In truth, we don’t know. It is the same in dealing with investors, or worse, their “gatekeepers.”

 

Tell The Truth

Most of the time in traveling through the investment cycle we don’t know where we are going or when the cycle will end. My approach is to share my current thinking, including identifying many things that I don’t know. I always try to look for clues that could possibly identify a change in direction.  I risk will be wrong some of the time before I recognize my mistakes. I believe we are in the early stages of an important change in the behavior of this cycle.

 

The Beginning of a Cyclical Change

(I hope my clients and beneficiaries forgive me for not getting the right decisions quickly enough.)

 

Evidence List

1. Lowest number of sales of previously owned homes since 2011.
2. Yields on 30-year Treasuries have broken above 5%.
3. Change in Leading Indicators, -9.67% for last 12 months.
4. Private Equity and Credits are struggling to find new clients, including the public, which is usually a sign of increased risk.
5. Fixed income-oriented funds have lost money for 3 years, some for 5 years. Funds invested in alternatives, value, and small company growth, are also struggling to perform.
6. If October stock and equity fund performance ends with a decline, the major averages will have declined for 3 months. The equally weighted S&P 500 Index has fallen this year.
7. It is possible the average stock may finish down for the year, completing a 3-year period of stagflation.
8. At current or higher interest rates, money previously invested in stocks may get invested in bonds, both by the public and by pension/retirement funds.
9. We are seeing signs of deflation in that sales discounts are showing up. Some may conclude President Biden is repeating FDR’s mistakes, which won’t end well and may possibly include a war.

 

Shopping List of Potentials

A number of well-known, former leading companies have new managements who have shifted their focus from building returns for shareholders to instituting policies that appeal to socially oriented institutions. This is particularly true for financial service companies, a sector likely to see more concentration. It is probably too soon to buy them, as they are likely to have a few more periods of less than good earnings ahead of them. These companies will either shrink to unimportance or will be better served by new management and owners.

 

Currently, most small companies are valued at half or less than large companies in terms of P/E or Price/Book value. These small companies are often better managed and more focused on investment returns. They could be the source of critical people and the attitudes needed for a turnaround.

 

Question: Are you looking for turnarounds?

 

 

 

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

Mike Lipper's Blog: Change Expected - Weekly Blog # 806

Mike Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805

Mike Lipper's Blog: Prepare to be Bullish, Long-Term - Weekly Blog # 804

 

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Change Expected - Weekly Blog # 806

 

Mike Lipper’s Monday Morning Musings

Change Expected

 

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

 

 

 

Unusual Items

• !200 CEOs give up their positions.
• Disappointing sales for LVMH among most of their 75 labels. High-end retail sales below expected results in almost all geographies, the most damaging being China and the US.
• Average ACT scores in the US are the lowest in 30 years, with Math scores of 19.5 out of a possible 36.
• Expect liquidity pool to shrink as consumers use up government cash. Will likely lead to market volatility.
• NASDAQ declines for the week, with 61% of prices down versus 50% for the NYSE. The NASDAQ has been the performance leader for some time.
• China is producing 49% of global shipbuilding and has 68% of ship orders. Some are high value and some high tech.

 

Most Logical Changes Expected

For some time, the mutual fund performance rank order has not varied much. Using the latest week through Wednesday and 5-year performance. Ranked by 5-year performance:

                    ---Performance---

                    Latest

                     Week      5-Year

Large-Cap Growth    +2.75%    +11.67%

Multi-Cap Growth    +2.40%     +9.19%

Medium-Cap Growth   +1.52%     +7.30%

Small-Cap Growth    +0.15%     +5.11%

 

International       +2.28%     +3.57%

Global              +2.00%     +2.62%                                                                                                                                                                                            

Point of View

Believing that we live in an irregular, cyclical world, I expect the domestic rank order to be reversed in some future market period. One reason is the current effort of the FTC to reduce M&A activity of large companies acquiring smaller companies in horizontal deals, which I expect to fail. I anticipate an increase in M&A activity in the financial services sector, which includes banks, fund management companies, investment advisers, and fintech operations. Highly effective salespeople will be greatly valued, as will critical tech people. There will be cross-border and cross-industry mergers.

                  

 

 

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Mike Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805

Mike Lipper's Blog: Prepare to be Bullish, Long-Term - Weekly Blog # 804

Mike Lipper's Blog: Selling: Art & Risks, Current & Later - Weekly Blog # 803

 

 

 

Did someone forward you this blog?

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Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

Stock Markets Move on Expectations - Weekly Blog # 805

 

Mike Lipper’s Monday Morning Musings

Stock Markets Move on Expectations

Commodities Move on Transactions

Most Economics Relate to Needs

Politics Rotate on Vote Guesses

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

 

Variables

These are among the more significant variables that investors and the rest of society juggle in reaching investment decisions. Most investors focus their attention on only a few variables. Some use just one, like price charts or reported earnings.

 

Perhaps my lack of confidence in understanding the complete details of variables drives me to look for correlations, which is why I ponder many variables. This tends to result in the creation of diversified portfolios of funds and individual securities. Because my clients and I invest to meet a number of different needs, our investments are focused on several time periods.

 

With these thoughts as guidelines, I’ll share a number of factors I am concerned about that leave me worried. I expect the future to include numerous changes, with some coming as surprises. My portfolios are likely to be fully invested, with a willingness to shift elements when I become more convinced of the wisdom of future actions.

 

The tragedy in Israel is too new to take into proper perspective. Thus, I am excluding it from this blog, but not from my mind.

 

List of Worries (Not in rank order)

1. The number of small company bankruptcies is rising, along with general error rates. These are some of the critical connecting points in our society and likely to have larger repercussions.
2. The drop in food consumption at low-end retail outlets suggests budgets are getting stretched.
3. Jaime Dimon’s 100-year prediction of a 3 ½ day work week leaves too much time for troublemaking.
4. Those with advanced degrees have lost confidence in colleges/universities. Students graduating with degrees, including PhDs, have no job opportunities for their degrees. (All the nobility were blamed, and many executed during the French Revolution.)
5. A little more than half of mutual fund peer-group averages have generated losses over the last 3 years. (There is a risk of people refusing to invest.)
6. As developing nations mature, they attempt to import replacement of some of their imports, which reduces world trade.
7. UPS and FedEx often sell at discounts. (Deflation)
8. 75% of the items listed in the WSJ weekend prices declined (Deflation)
9. The S&P Goldman Sachs Commodity Index rose +4% in September. Due to dollar strength, Energy and Metals rose +3.5%, with Agriculture falling -4.35%. There may be some speculative input in these numbers.

 

Critical Questions:

1. What are the indicators you are watching?
2. What do you think?
3. Will you share your thoughts?                                                                          

 

 

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

Mike Lipper's Blog: Prepare to be Bullish, Long-Term - Weekly Blog # 804

Mike Lipper's Blog: Selling: Art & Risks, Current & Later - Weekly Blog # 803

Mike Lipper's Blog: Investment Thinking During a Lull - Weekly Blog # 802

 

 

 

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Prepare to be Bullish, Long-Term - Weekly Blog # 804

 

 Mike Lipper’s Monday Morning Musings

Prepare to be Bullish, Long-Term

 

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

 

 

  

(N.B. in classical documents was a Latin warning for the reader to be prepared for elements of disbelief. Subscribers are likely to disagree with some or all points made. Nevertheless, they should be digested, even though they might question your firmly held beliefs. Some of these thoughts might even reinforce your own beliefs. In medieval courts there was often a paid clown or “fool” who might cleverly utter some thoughts that no one else would dare say. Perhaps, this is the role of this blog.)

 

Focus on the Finish Line

Almost all commentary about the market, economy, and individual prices without attempting to identify the end period outcome is lacking. One lesson from the racetrack was the order of finish from a particular race. The payoff parade was the actual running of the race, not any of guessing, analysis, or handicapping bettors did before the race.

As both an investor and a registered advisor, I attempt to make a guess at either the actual or relative return after an extended period. The minimum time period I am comfortable using to make an investment decision is five years. One reason I pick five years is a lesson learned at the track about the element of surprise, or “racing luck”, in any given race. In longer races there is greater opportunity to recover from a surprise than in shorter races. The second reason to focus on a five-year period was highlighted by the communist party. (I suspect they copied various business plans in the 19th century by instituting a 5 year political term.)  Many CEOs also negotiate a five-year term with their board of directors for incentive compensation. 

 

2028!?

Most money in the securities market is invested to meet retirement obligations or long-term capital expenditure needs. Those responsible for attempting to meet these needs should be judged by their performance over longer periods.

 

While you can never clearly identify the type of period we are presently in, I think it is the responsibility of the investor to make his/her best guess, as the type of market will probably impact the results.

 

2022 Change

While no single event is likely to change the direction of society or the economy, there is often a headline occurrence which can serve as a useful label. The single change that became a turning point for me was the COVID Pandemic. The Black Plague occurred centuries ago, and there were serious pandemics in the Spanish Flu in the1920s. However, for the most part pandemics in the modern era have been rare.

 

The reaction by the US government, led by the teachers’ union, materially changed the progress of society. Focusing exclusively on the securities markets, 2022 was a down year, due to curtailment of work and formal education. Governments rarely let a crisis go to waste and by 2023 government expenditures and curtailment of selected industries had enhanced inflation. Appropriate parallels were made with FDR’s elongation of a recession into a depression. 

 

First 9 Months of 2023

Perhaps it is ironic that little New Zealand’s central bank was the first to call for a 2% inflation goal and have its current indices generate a minus in front of them. The US may not be far behind, with Real Estate -5.4%, Consumer Staples -4.76%, Healthcare -4.09%, and most concerning, the S&P 500 equal weighted up only +1.79 %.

 

Where’s the Upside?

Almost all life is cyclical, with the largest gains resulting after major declines. The longer the current period of stagflation, the longer the hidden actions of building future earnings power will be at work.

 

On a longer-term basis, continued federal government deficits are a symptom of important twin deficits. Capable management throughout society, and the inability of the educational system to produce students suitable for current jobs. From pre-K to PhD, schools are producing unmotivated students who are ignorant of the world and irresponsible, primarily due to the views of their instructors.

 

Parents and employers are slowly exerting pressures for change, while businesses are evolving to meet the current needs of their customers. A non-recommended example is ADP, a company in our private financial services fund. The company started 74 years ago as a payroll service business. Today, with over one million clients, they have evolved into a Human Capital Management business providing a much larger contribution to their clients. 

 

The Public Accounting Oversight Board has stated that they are finding an alarming number of errors in audits. We are finding the same trend in providing many services to clients, which presents an opportunity. One other opportunity might be the mismatching of expected industrial demand for “modern” cars, data centers, and equipment to change the climate. To support these efforts there is a need for large quantities of high-grade steel production and there are no provisions to expend production.

 

Savings, possibly the biggest contributor to the value of stock prices in 2028 will be in the hands of a new generation of political leaders and managements of profits and non-profits. Hopefully they will make better decisions than in the recent past.

 

Please share with me your thoughts.

 

 

 

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

Mike Lipper's Blog: Selling: Art & Risks, Current & Later - Weekly Blog # 803

Mike Lipper's Blog: Investment Thinking During a Lull - Weekly Blog # 802

Mike Lipper's Blog: Need For a Correction Decline - Weekly Blog # 801

 

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.