Reading the Future from History - Weekly Blog # 863

 

 

 

Mike Lipper’s Monday Morning Musings

 

Reading the Future from History

 

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

 

 

 

History May Suggest:

1. The American People Won the Election
2. The Recession has started

 

The Declaration of Independence was signed on August 2nd, 1776, the US Constitution was passed in 1787, and the last state (Rhode Island) ratified it in 1790. Today, Rhode Island still remains the smallest state in the Union. Thus, since the beginning of our nation the rights of our smallest state have been critical to our progress. One of the many things making the US different than other republics is The Founding Fathers fear of the tyranny of the larger states on the smaller states. Consequently, our Electoral College favors state representation over population. In the 2024 election, even though President Trump polled more votes than Vice President Harris, the House is almost evenly split, but he won 36 states and lost only 14, mostly on the coasts or major rivers.

 

This split is one reason I suggested President Trump will likely have difficulty getting much legislation easily passed through both houses, where he only has a majority of about five votes. Of the 14 major issues, only two can be accomplished through just executive orders.

 

Actually, many if not most Americans are pleased with the results of the election. An incompetent government was dismissed before it became even more intrusive and has been replaced by a new administration with untried ideas. New legislation will be delayed by a disruptive Congress and a slow-walking Deep State. Many Americans would like it if the air conditioners in D.C. did not work, fulfilling Hamilton and Madison desire that government work be part-time.

 

Recession Coming?

As someone rowing in a boat with the wind picking up and clouds darkening, you become relatively certain it will soon rain. The question is, will you get to dry land before getting really wet?

 

Evidence of an economic storm on the horizon can be summed up as follows:

1. Stock analysts have been instructed for generations that high quality bonds are more sensitive to economic changes than stocks, at least initially. Currently, yields have been going up (prices down). However, mid-quality bond prices have barely moved at all, something overseas fixed income investors are very sensitive to.
2. Most US stock prices declined this week, with just 37.7% of the stocks on the NYSE rising and only 27.6% rising on the NASDAQ. NASDAQ stocks have performed better than those on the “Big Board” for some time and are cheaper on a market to book value basis. This suggests the NASDAQ investor is a more professional investor.
3. The American Association of Individual Investors (AAII) weekly sample survey of investors indicates the bullish or bearishness sentiment of their investors for the next six months. In the last three weeks, the bullish reading has risen to 49.8% from 39.5%, while the bearish reading only went down to 28.3% from 30.9%. Market analysts believe the “public” is often wrong at turning points. With that in mind, it is interesting that the bulls gained 10.3% while the bears dropped only 2.2%.
4. The weekend WSJ tracks some 72 prices of stock indices, commodities, ETFs, and currencies. This week only 12.5% were up, with Natural Gas up a leading 5.77%. The remaining gainers all rose by less than 2%. This likely indicates sophisticated investors are nervous about what lies ahead.

 

 

Thoughts?

 

 

 

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Mike Lipper's Blog: Inflection Point: “Trump Trade” at Risk - Weekly Blog # 862

Mike Lipper's Blog: This Was the Week That Was, But Not What Was Expected - Weekly Blog # 861

Mike Lipper's Blog: Both Elections & Investments Seldom What They Seem - Weekly Blog # 860

 

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Inflection Point: “Trump Trade” at Risk - Weekly Blog # 862

 

Mike Lipper’s Monday Morning Musings

 

Inflection Point: “Trump Trade” at Risk

 

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

 

 

 

When Traveling We Often Don’t Know We Are Lost

As a portfolio manager for multi-generational accounts, it is critical to continually focus on the long-term funding needs of accounts, particularly when I am no longer around. In effect we are on a long march, which was part of my training as a USMC officer. (Most of our subscribers will read this blog on the 249th Birthday of The Corps) Rarely does a long march go in a straight line and each turn could be a minor change in direction. Alternatively, it could be a significant change in direction to avoid future danger. At some point a good Marine will recognize that we have passed a critical inflection point.

 

Our fellow investment marchers should be aware of a meaningful change in direction, speed of travel, and a different set of tactical moves. As an officer, it is my duty to consider changes.

 

Recent chatter from various investment pundits suggests there are various “Trump Trades”. Without making a judgement on each suggestion, I am willing to bet a year from now at least half those trades will not have worked out.

 

These trades are based on the 45th President’s actions and campaign comments. I believe no one knows what the 47th President will be able to get accomplished in his first year. We may think we know what he wants to do, but the world has changed both domestically and internationally and he doesn’t know for sure. Based on history, I am concerned about how Congress will follow direction. In many ways, both Chambers of the two major parties are split internally.  Just look at the number of announced caucuses and the potential number of informal voting blocks. Republican majorities in both chambers are likely be under 10 members. Furthermore, the incoming President did not do much to get many members elected. There are a number of Senators who see themselves sitting in The Oval office after the 2028 elections.

 

My portfolio management suggestions for protecting portfolio manager’s jobs are the following:

1. Divide the Trump Trades in half and hold one half for the next year.
2. With the second half, subdivide into twelve equal groups and sell one group each month for the next year.
3. Put the freed-up cash in an equal-weighted S&P 500 index fund if you must be invested, otherwise put the cash in a money market fund.

The above tactic is for short exposure but does not address the real problem.

 

Lack of Competent Leadership is the Problem

As a society Americans have become defensive about their own worth and their jobs. We seek to acquire the credentials that qualified us at some point in time for a particular job, “guaranteeing” that job and income. Once we have the credentials, we no longer need to compete. The longer the elapsed time from when we “earned” the credentials, the less talents we acquire. To offset this deficiency, we lean more on support staff. During WWII it required eight support people for every fighting man (mostly men).

 

This is true not only in the military, but also in medicine, government and schooling. (Note, I didn’t say education.) The larger the staff, the more bureaucratic the control systems get. (A classic example is the Ukrainian fighting people vs the Russian Army.) In general, the more people involved the less efficient the group gets and the longer it takes between promotions.

 

Our so-called educational system (school and university) has molded our workforce since the 1920s. The Communist Party thought that if they could control New York and other school systems they could impact the government, aided by the Depression. The key for union teachers was protecting their jobs by teaching-to-pass exams, both for teachers and students. They were not taught how to think. This strategy was remarkably successful.

 

These teachers trained many of the senior teachers who trained the senior college and university students of today, which explains the political efforts of the majority of teachers today. Trustees and Deans don’t control most of the critical choices of their schools. The faculty senate are the main decision makers, run on a seniority basis.

 

These are the people who are teaching the leaders of today and tomorrow in government, medicine, and business. They tend to favor large organizations, despite most progress in society originating from smaller groups.

 

Inflation is not the Problem

Inflation is society’s way of dealing with imbalances between current supply and demand. Attempts by a top-down government to control the urges of people to balance supply and demand are not useful. Every attempt to control these forces has enlarged grey and black markets, often summoned in regulated and expensive markets. Most supply shortages are due to government regulation for the benefit of friends of the government.

 

In Conclusion

If we have entered a new cycle, we may see a very different set of trends that we will need to understand and master. Any thoughts on how to manage long-term portfolios?

 

 

 

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

Mike Lipper's Blog: This Was the Week That Was, But Not What Was Expected - Weekly Blog # 861

Mike Lipper's Blog: Both Elections & Investments Seldom What They Seem - Weekly Blog # 860

Mike Lipper's Blog: Stress Unfelt by the “Bulls”, Yet !! - Weekly Blog # 859

 

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This Was the Week That Was, But Not What Was Expected - Weekly Blog # 861

 

Mike Lipper’s Monday Morning Musings

 

This Was The Week That Was,

But Not What Was Expected

 

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

 

 

 

 “Trump Trade”, An Artifact of History

No one really knows which of the new administration’s critical rules and regulations will become law. Both presidential candidates have announced and unannounced wishes, but both are unlikely to get another term. They will have little ability to help various members of Congress win the ’26 or ’28 elections.

 

Unless there is a one-sided sweep of both Houses for the same party, the odds favor majorities in the single digits. While the rest of the world might think Congressional leaders will be able to command political discipline, both parties are split into multiple groups depending on the particular issue. Furthermore, in the Senate there are members who see themselves sitting in the White House after the ’28 elections.  Looking beyond the intramural games of the next four years, there are two elements of news that should be of importance to those of us selecting assets to meet the needs of longer-term investors.

 

The Declining Dollar

The CFA Institute Research & Policy Center conducted a global survey of 4000 CFAs concerning the future value of the US Dollar. The survey was conducted from 15 to 31 of July 2024. They published their findings in a white paper titled “The Dollar’s Exorbitant Privilege” (This is what the French President called the dollar years ago.)

 

A supermajority of respondents believe that US government spending is not sustainable. Only 59% of US Treasury investors believe the US can continue to borrow using Treasuries. (I remember there was a time when we created a special class of Treasuries for the Saudi Arabia, with an undisclosed interest rate). Neither of the two Presidential Candidates have announced any plans to reduce the deficit and both are unannounced pro-inflation. The respondents expect the dollar to be replaced by a multipolar currency system no later than fifteen years from now.

 

Some investors already recognize the risk in the dollar. Bank of America’s brokerage firm noted this week that 31% of their volume was in gold and 24% in crypto, as a way to reduce total dependence on the dollar. One long-term investor diversifying his currency risk is Warren Buffett. After doubling his money in five Japanese Trading companies, he is now borrowing money in Yen.

 

Berkshire Hathaway’s 10Q

As a young analyst I became enamored by their financial statements, long before I could afford to buy shares in Berkshire. In the 1960s I felt a smart business school could devote a whole semester to reading and understanding the financial reports of Berkshire. It would teach students about equity investments, bonds, insurance, commodities, management analysis, and how politics impacts investment decisions. (It might even help the professors learn about the real world)

 

On Saturday Berkshire published its third quarter results with a relatively concise press release, which was top-line oriented. As is required by the SEC it also published its 10Q document, which was over fifty pages long. Ten of those pages were full of brief comments on each of the larger investments. This is what hooked me, although I could not purchase most of their investments because they are not publicly traded. Their comments were in some detail, covering sales, earnings, taxes paid, expense trends, and management issues. The comments gave me an understanding of how the real economy is working. (Along the way I was able to become comfortable enough to buy some shares in Berkshire, and it is now my biggest investment.)

 

The latest “Q” showed that in nine months they had raised their cash levels to $288 billion, compared to $130 billion at year-end.  At the same time, they added $50 billion to investments. Perhaps most significant was that they did not repurchase any of their own publicly traded stock. A couple of years ago at a private dinner with the late and great Charley Munger, I asked him if I should value their private companies at twice their carrying value (purchase price + dividends received). Charley counseled me that everything they owned currently was not a good investment. As usual he was correct. In this quarter’s “Q” there were a significant number of investments that declining earnings or lost money. (I still believe they own enough large winners on average where doubling their holdings value would be reasonable.) If one looks at the operations of a number of industrial and consumer product entities, they themselves conduct substantial financial activities in terms of loans and insurance.

 

Is Warren Buffett’s Caution Warranted?

Some stocks have risen so high that they may have brought some gains forward, potentially reducing future gains. One way to evaluate this is to look at the gains achieved by the leading mutual fund sectors: Total Return Performance for the latest 52 weeks are shown below:

 

Equity Leverage       61.16%

Financial Services    46.38%

Science & Tech        44.13%

Mid-Cap Growth        41.28%

Large-Cap Growth      40.30%

 

I don’t expect all to be leaders in the next 52 weeks, as the three main indices (DJIA, SPX, and the Nasdaq Composite) have “Head & Shoulders” chart patterns, which often leads to a reversal.

 

Question: What Do You Think?

 

 

 

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Mike Lipper's Blog: Both Elections & Investments Seldom What They Seem - Weekly Blog # 860

Mike Lipper's Blog: Stress Unfelt by the “Bulls”, Yet !! - Weekly Blog # 859

Mike Lipper's Blog: Melt-Up, Leaks, & Echoes of 1907 - Weekly Blog # 858

 

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Both Elections & Investments Seldom What They Seem - Weekly Blog # 860

 

Mike Lipper’s Monday Morning Musings

 

Both Elections & Investments

Seldom What They Seem

 

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

 

 

  

Gilbert & Sullivan nailed it when they titled one of their songs in H.M.S. Pinafore “Things are Seldom What they Seem”. This title should be attached to every article that discusses the investment implications of the next election and future elections. Currently, almost all the chatter is about the Presidential election, which also gets exclusive attention overseas. This is naive in the extreme for the following reasons:

1. Whoever is going to be sitting in the Oval Office will not likely be there for another term. Thus, they will likely have limited political power on Capitol Hill.
2. The House must start all tax and spending bills and both parties are split along ideological lines.
3. The Senate, with 6-year staggered terms, requires critical legislation to be passed by 60 votes. They wish to terminate the filibuster rule. Politically, the senate is even more divided than the house. Additionally, a number of senators are interested in having a seat in the White House and they typically have larger financial estates than members of the House.
4. Both political parties believe Washington should dictate what Americans purchase by using grants and tariffs. (Democrats favor “EVs” and labor union produced voters, while Republicans seem to favor tariffs. Our economic history shows that countries supporting consumer choice grow faster and sounder.)
5. With deep divisions on Capitol Hill and changing legislative leadership, including the chairs of committees on the Republican side, it is going to be difficult to get bills passed.
6. The role of the Supreme Court will be critical. The present Court believes it is responsible for determining when cases comply with the written Constitution. This Court decided that a prior court decision on Roe vs. Wade was unauthorized. The issue was not about abortion, but whether the “Warren Court” 50 years ago sanctioned abortion under the Constitution. The Founding Fathers limited the powers of the Federal government to those items specifically enumerated in the Constitution, leaving all other decisions to the individual states.   

 

Possible Peak Two Fridays Past

Some investors are more focused on their long-term investment responsibilities than political decisions. However, too many economists have become mathematicians and too many political scientists have become statisticians.

 

Some of the signs that all is not well:

1. AAII’s weekly sample survey of investor sentiment changed dramatically. Two weeks ago, there was 20 percentage point advantage in favor of the bulls for the next 6 months. In the most current week, this position shrank 7% points.
2. The weekly share volume on the NYSE declined 42,209 shares, while NASDAQ volume rose 3,034,261 shares. (Considering prices fell during this period, the increase in volume is bearish.)
3. Standard & Poor’s tracks 32 indices weekly and only 1 rose last week, by only 0.05%.
4. The underwriting of speculative bonds rose sharply in late September and thus far in October. The sharp increase in underwriting was well beyond the need to refinance existing debt. This suggests savvy speculative bond issuers see higher rates ahead when they need to sell more debt.

 

Question: How do you see interest rates in late 2025, 2026, and 2028?

 

 

 

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Mike Lipper's Blog: Melt-Up, Leaks, & Echoes of 1907 - Weekly Blog # 858

Mike Lipper's Blog: Stress Unfelt by the “Bulls”, Yet !! - Weekly Blog # 859

Mike Lipper's Blog: Mis-Interpreting News - Weekly Blog # 857

 

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Stress Unfelt by the “Bulls”, Yet !! - Weekly Blog # 859

 

 

 

Mike Lipper’s Monday Morning Musings

 

Stress Unfelt by the “Bulls”, Yet !!

 

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

 

 

 

One measure of future dangers is the length of time identified stress points are ignored. Often, the longer the period of being unaware of increased risk levels, the greater the damage. The reason for this is that more assets are committed, so more damage is sustained. Somewhat like a pain in the mouth or heart.

 

The following stress points are in plain sight and should be diagnosed, even though some may not lead to sustained account damage or damage to clients’ capital. However, the real damage of a meaningful decline is often the lack of confidence to take advantage of the recovery. The following concerns are not in any particular order.

• Pet owners are trading down.
• PPG is selling their original business.
• As mentioned in the FT, “Corporate debts as credit funds allow borrowers to defer payments using higher cost payments in kind “PIK”.
• McKinsey is cutting their workforce in China.
• There is an assumption that the first Fed rate cut is the beginning of a rate cycle of lower rates.
• After all the government spending (election-focused bribes), the civilian labor force is only up 0.48% year over year, while government payroll is up +2.26%.
• Barron’s 10 high-grade bond yields declined -27 basis points compared to a gain of +8 points for medium-grade bonds. (Wider spread for added risk?)
• Consumer confidence fell 5.37 % last month.
• The percentage of losing stocks compared to all NYSE stocks was 1.7% vs 5.1% for NASDAQ stocks.
• Jason Zweig in the WSJ quoting Ben Graham “Investing isn’t about mastering the market it is about mastering yourself.” I agree and I pay a lot of attention to what Jason and Ben say. (I was given the Ben Graham award as President of the New York Society of Securities Analysts (NYSSA)).
• P&G noted that their customers in the US and China were switching to cheaper brands.
• In the 3rd quarter, American Express* had revenue gains of +8% and earnings gains of +2%. (A classic example of the cost to produce a revenue dollar becoming more expensive. (*A small position is owned personally.)
• Volkswagen is closing German factories for the first time since 1938.
• In Europe, some are starting to watch for disinflation. (Disinflation is much rarer than inflation and is much worse, as people reduce or stop spending.) 

 

Most current global political leaders are ignorant of micro-economics and thus can’t grasp macro-economics. They are not wholly responsible for this condition because their teachers didn’t understand them either. We will all pay the price for this ignorance.

 

 

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

Mike Lipper's Blog: Melt-Up, Leaks, & Echoes of 1907 - Weekly Blog # 858

Mike Lipper's Blog: Mis-Interpreting News - Weekly Blog # 857

Mike Lipper's Blog: Investors Not Traders Are Worried - Weekly Blog # 856

 

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Melt-Up, Leaks, & Echoes of 1907 - Weekly Blog # 858

 

Mike Lipper’s Monday Morning Musings

 

Melt-Up, Leaks, & Echoes of 1907

 

 

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

 

 

 

A sportscaster’s view of the US stock market is that many prices are gradually rising in a “melt-up”. But the owners of the teams, when possible, are curtailing spending. Some of the fans’ happy talk appears to be leaking away, particularly as the return on the value of their assets decline. Those who think only in terms of numbers, particularly streaks, should be worried. For the first time in 40 years the Vanderbilt football team beat Alabama!!! (This highlights the difference between a statistician and an analyst. A numbers hound believes the past is always prolog to the future, whereas a good analyst scans present conditions to determine the odds of a streak being disrupted. It is never zero.) Because of evolutionary changes in laws and technology the past should be viewed in terms of modern times. On the contrary, human behavior rarely changes under similar conditions, although it may impact the odds.

 

Something About the Name of Morgan and Financial Crisis

After a long period of financial expansion and the creation of new financial institutions, it was trust-companies, not banks that were in danger of failing after experiencing difficulty collecting on their loans. (The modern analogy could be private capital funds.) Trust-companies borrowed from banks and were publicly traded, but by 1907 there were concerns that a number were insolvent and would fail. JP Morgan, the man, was concerned and called a meeting of leading bankers to meet him in his library, which he locked until the bankers promised to contribute sufficient capital to rescue one large trust-company. By so doing, he single-handedly stopped the “Money Panic” of 1907.

 

While politicians in Washington were grateful, they felt Morgan had too much power. Consequently, a few years later they created the Federal Reserve Bank, which had supervisory power over large banks. This was The Fed’s initial mission and today it is really their first mission.

 

Jaime Dimon is the current CEO of JP Morgan Chase*, the largest US bank in terms of assets. JP Morgan Chase is the unofficial leader of the banking industry, so it goes without saying they see a parallel to the 1907 crisis. He is pleading for a modern solution that allows small banks to merge without time-consuming government regulation. *We are a small owner of shares in JP Morgan Chase and use the Private-Bank facilities.

 

Other Concerns

• Our European military allies in support of Ukraine and future wars are worried. There are concerns regarding the production of ammunition and other armaments, particularly during the present decline in our productivity. The rise of union workers will additionally shrink the corporate profits used to invest in research and expansion.
• The changing business structure of the investment market. There are concerns that stock exchanges around the world now earn a decreasing minority of their earnings from their initial business of trading and clearing securities. There are fewer brokerage firms, less daily liquidity, and more direct transactions.
• Brief news releases, repeated frequently, leads to a simplistic understanding of the economy, investments, and politics. For example, most news briefs focus mostly on movements in the New York Stock Exchange. However, there are numerous trading days where NYSE issues move in one direction and NASDAQ issues move in the other. The daily movement in the Dow Jones Industrial Average (DJIA) is much more volatile than the NASDAQ Composite. (Could it be that Washington has limited capacity to understand the difference between light-volume moves and high-volume moves?) On an average day the NASDAQ trades about five times the volume of the NYSE. (Part of this spread is the amount of trading between dealers to even-up their positions.) The Year over Year volume for the Big Board is down -11.26 %, whereas NASDAQ volume is up +26.27%. From an analysis vantage point, we see major differences between the two markets. On Friday, the percentage of new lows on the NYSE was 2.4% of issues traded vs 7.2% on the so-called junior exchange. (Is the NASDAQ showing it is closer to a peak after doing so much better for the year?)

 

Question: What are you concerned about?         

 

 

 

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Mike Lipper's Blog: Mis-Interpreting News - Weekly Blog # 857

Mike Lipper's Blog: Investors Not Traders Are Worried - Weekly Blog # 856

Mike Lipper's Blog: Many Quite Different Markets are in “The Market” - Weekly Blog # 855

 

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Mis-Interpreting News - Weekly Blog # 857

 

Mike Lipper’s Monday Morning Musings

 

Mis-Interpreting News

 

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

 

 

 

Understanding Motivations Before Accepting

Investors and other voters should always search for the motivations of people or organizations distributing investment and political solutions. Most of those using megaphones recognize that only a small portion of their audience will react quickly to the pundits besieging them to make commitments of time, votes, or money. Peddlers consequently boil their pitches down into simple sounding solutions. (When have important considerations ever been made briefly?)

 

In terms of making decisions regarding investments, the media is full of quick and often wrong recommendations. For example, far too many investors have been informed that the rise or fall of interest rates, as determined by the Federal Reserve, is the key determinant of future investment performance and the growth of global economies.

 

As a trained sceptic and rarely a bettor on favorites at the racetrack or in other competitive games, I suggest interest rate changes result from the numerous impacts of identified and unidentified forces. I believe the following factors should be considered:

1. Remember, the Fed was created to replace the power of J.P. Morgan, the man, the bank, and the use of his locked library. During the Wall Street crash in 1907 numerous trust companies were failing, with still more expected to fail. Mr. Morgan called for a meeting of the leading bankers in his library. After assembling the bankers in the library, he locked the doors and stated he would not unlock them until all bankers committed funds to the bailout of a failing trust company that had made poor loans. The Washington government felt too much power was entrusted to one man. Relatively soon after they organized the Federal Reserve Bank. With an eye to public relations, they never specifically stated the real reason for creating the Fed, which was to reduce the risks of bank failures due to bad loans. Bank failures continue to be a risk in the US, and some have occurred in numerous other countries in Europe and Asia. Today, the Fed has supervisory power over a portion of US banks, which is their first order of business.
2. Demographics and Psychographics change slowly most of the time but have long-term impacts on our financial and political structure. An example is our falling birthrates and the fall in educational standards, which probably leads to declining productivity levels.
3. Both trade and military wars create imbalances, which in turn cause global economic changes.
4. Discoveries of natural resources and those made in a laboratory can cause economic and political disruptions Remember what the discovery of gold in Latin America did to the economies of Europe and America. The discovery of oil in the US and Saudi Arabia was equally disruptive of the status quo.
5. The personalities of leaders and managers are very different in terms of their focus on the short and long-term decisions.  

 

Since we don’t conduct in depth psychological interviews with a wide sample of the economy, we don’t know why people act the way they do. We tend to believe that events occur close to when decisions are made. This has led to following beliefs and their assumed stimuluses:

1. Clark Gabel’s appearance in a film bare chested killed subsequent undershirt sales.
2. After the movie Matrix 2, Cadillac dealers couldn’t keep large SUVs in stock due to sales demand.
3. The lipstick indicator and the length of women’s skirts were each believed to predict the direction of the stock market.

 

I don’t know what will cause of the next recession or depression, but one or more of the non-Fed rate cuts may be the first indicator of problems ahead and deserve to be watched.

 

Some Attention Should be Paid to the Following Factors

1. One of the causes of WWII was the US putting an oil Embargo on Japan. The same administration had our aircraft carrier leave Pearl Harbor without protective support ships in December 1941. (It was the planes from these carriers that led to a victory around Midway.)
2. More recently, there has been a 75% decline in commercial flights from China to the US. Most of the decline due to reductions by Chinese airlines.
3.  Around the world, bank depositors are moving up to half their money into investments, accepting the risk that goes along with it.
4. A survey of Japanese workers suggests that 25% will be searching for jobs in 2025. (Lifetime employment used to be standard in Japan.)
5. 20% of Indian retail investors are accepting risk.
6. Manufacturing has hired less people in three out of the last four months. Even more significant for our country is an increase in short-term consumption spending, not longer-term investment needs.
7. People have diverse views regarding investments and other expenditures. The prices for NYSE and NASDAQ stocks rose this week, while the plurality of bullish views declined in the AAII weekly sample survey. In the latest week, the bulls had an 18% advantage over the bears, down from a 26% advantage the prior week.

 

Please share your thoughts.

 

 

 

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Mike Lipper's Blog: Investors Not Traders Are Worried - Weekly Blog # 856

Mike Lipper's Blog: Many Quite Different Markets are in “The Market” - Weekly Blog # 855

Mike Lipper's Blog: Implications from 2 different markets - Weekly Blog # 854

 

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Investors Not Traders Are Worried - Weekly Blog # 856

 

Mike Lipper’s Monday Morning Musings

 

Investors, Not Traders, Are Worried

 

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

Investors are concerned that their US dollar capital could be insufficient to completely fulfill their important responsibilities. Not all their concerns will be successfully addressed, many of them will likely continue to be problems for capital owners and beneficiaries. A short list of the visible problems follows in no particular order:

1. The number of voluntary and non-voluntary retirees is growing in many developed western countries. They are growing faster than the number of workers eliminated by “AI’s” future impact. In the US today there are four workers for every retiree. It used to be nine.
2. The American privilege of having the most valuable currency is fading. One Presidential candidate wishes for a lower value, while both advocate for disguised inflation that will reduce the value of US currency. This will lead to higher interest rates on debt sold to overseas buyers.
3. One of the ways the wealthy protect themselves is by reducing cash holdings in favor of investing in various forms of art. “The Art Market Is Tanking” according to WSJ’s front-page article on auction prices and volumes.
4. Increasingly, investors and corporations are using exports and foreign investments to escape local regulations and taxes. Globally, 128,000 millionaires plan to move their domicile in 2024.
5. The Fed’s reduction in interest rates is unlikely to lead to a “soft-landing”, unless fresh capital is invested in plant/equipment.
6. Forty three percent of the stocks in the Russell 2000 are unprofitable. Unless the contemplated government grants to new start-ups is run by the SBA or a similar agency, it will lead to large scale losses of family and friends’ capital.
7. The CFA Institute conducted a survey of 4000 CFAs regarding their current view of the market/economy. The findings which will be published shortly are distinctly negative in terms of their outlook. (CFAs earn their designation by passing three rigorous academic type exams. It is worth considering that 4000 CFAs responded to the questions, compared to roughly 1000 in various WSJ and other polls. While there are a number of CFAs that work for brokerage/investment bankers and hedge funds, I guess over half the poll participants work for financial institutions. Most of their clients are more long-term oriented than the clients of many brokers, investment bankers, and hedge funds.)

                                                                                             

Hopefully these views will raise questions and disagreements that subscribers can share with me.  

 

 

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Mike Lipper's Blog: Many Quite Different Markets are in “The Market” - Weekly Blog # 855

Mike Lipper's Blog: Implications from 2 different markets - Weekly Blog # 854

Mike Lipper's Blog: Investors Focus on the Wrong Elements - Weekly Blog # 853

 

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Many Quite Different Markets are in “The Market” - Weekly Blog # 855

 

Mike Lipper’s Monday Morning Musings

 

Many Quite Different Markets are in “The Market”

 

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

Main Motivations

No one invests to lose money, even if there is a clear chance of loss due to a decline in prices, inflation, or currency values impacting spending. To reduce the odds of disappointment one can diversify, which in theory reduces the risk of a total wipe out. (Except from a large meteor or similar tragedy.)

 

As the potential number of investments is so large, most people choose to narrow the list down to a manageable number. Very few people make the choice of investing in their own work, which could produce the highest lifetime return on work.

 

For the most part, diverse investments are packaged by marketing agents to make choosing easier and generate a profit for the marketer and her/his organization. To make their job easier during their limited selling time, they wrap their sales pitches with labels. The three most popular labels in the fund world are Growth, Core, and Value. Investments are not labeled by the issuer or the marketplace where traded. Although the distribution and administration processes are significant, they are governed by economics. (If one can sell the same product many times, the marketing and administration cost per sale can be smaller than the distribution/administrative cost for selling only once.)

 

The main motivation for investors, after making money, can be summed up under two categories. Excitement & Entertainment and Generating Capital/Income for future spending. Many traders interested in the first category judge the market by following the Dow Jones Industrial Average (DJIA), along with the volatility of the Nasdaq Composite Index. Serious investors attempting to earn capital and income over extended periods focus more on the Standard & Poor’s 500 Index (S&P 500).

 

The biggest risk in owning any security is not the issuer or its traded market, but the risk created by one’s co-venturers. If a large enough number of investors panic, they can pierce a chart’s support levels and bring on more selling, which could bring on even more selling. If the stock is critical to the forward momentum of the market, the price action could end the current phase of the market.

 

Understanding Data

It is critical to understand how large-cap funds perform, because they not only have the largest earnings in the fund business, but in aggregate probably represent the largest allocation of investors’ money. (Large-Caps represent at least 80% of the general equity in stocks.) Excluding sector funds and global/international funds, large-cap funds represent 33% of assets invested in mutual funds, with growth funds accounting for $1.55 trillion, core funds $1.09 trillion and value funds $0.66 trillion. When I created fund measurement data, I found it useful to look at the totals three ways; weighted, average, and median. The resulting numbers are meaningfully different. Growth funds year-to-date to September 19th show a weighted average return of +17.79%, an average return of +14.61%, and a median return of +13.48%, for a spread of 4.31%. In the small-cap peer group the spread was only 0.54%, showing the impact of size on the results.

 

Impact of Universes

Through the end of the latest week the volume of shares traded for the year was up +12% for the NYSE and 31% for the NASDAQ. In terms of advances/declines, 69% of NYSE stocks rose while 59% rose on the NASDAQ.

 

Hunting Grounds

I was trained to look for badly performing stocks that might be big future winners. In looking at poorly performing fund sectors two sectors caught my attention, China Region and Dedicated Shorts. Both have produced five-years of loses.

 

It has also been useful to reduce commitments when a sector is changing its source of new capital. Private Equity funds are now growing in popularity with the retail crowd of advisors and their customers.

 

Conclusions:

Be careful, many investments are likely much closer to their next five-year’s highs than their five-year lows.

 

 

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

Mike Lipper's Blog: Implications from 2 different markets - Weekly Blog # 854

Mike Lipper's Blog: Investors Focus on the Wrong Elements - Weekly Blog # 853

Mike Lipper's Blog: Lessons From Warren Buffett - Weekly Blog # 852

 

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Implications from 2 different markets - Weekly Blog # 854

 

Mike Lipper’s Monday Morning Musings

 

Implications from 2 different markets

 

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

 

 

 

On balance the New York Stock Exchange (NYSE) and NASDAQ stocks serve very different investors, as they have different outlooks and current performances. The “Big Board” stocks tend to be older, larger capitalization, have greater media exposure and get more attention from Washington. They are likely to populate brokerage accounts managed or influenced by former commission generators who have since converted to being fee paid advisors. The NYSE also services institutional accounts with substantial capital with limited research and trading professionals, which generally appeals to older clients.

 

Those in Washington and “news” rooms may not be aware that the NASDAQ is home to 4627 stocks vs 2903 for the NYSE, as of this week. In recent years the NASDAQ composite has materially outperformed the NYSE stocks, often identified as the 30 stocks in the Dow Jones Industrial Average (DJIA).

 

NASDAQ stocks are often more volatile than those traded on the NYSE, because they are smaller and have fewer liquidity providers. This may be the reason why those without trading experience shy away, resulting in more block trades and 3-5 times more NASDAQ volume.

 

Many people confuse the NASDAQ with its Over The Counter (OTC) origin. The NASDAQ is a regulated stock exchange, distinct from the OTC market which is held together by the pink and yellow sheets publishing the competing bid and asked spreads of competing dealers. Since its earlier days, important constituents of the NASDAQ have consisted of local companies, medium size banks, and some foreign stocks.

 

While the NYSE focused on its regulatory responsibilities, the NASDAQ grew through an extensive marketing effort. This marketing effort happened at a time when a large number of what we now call “Tech Companies” were looking to find a trading home. These tech companies joined the NASDAQ exchange, attracting younger, more aggressive, professional investors and traders.

 

Implications

Trying to determine the future is impossible, but military intelligence (an oxymoronic term) attempts to do this by gathering separate elements of information to see if they provide a pathway to one of many futures. This is the approach I take in thinking about the future. While most pundits focus on present price relations, I don’t find them particularly useful. We need to guess what future prices will be for specific future periods.

 

In the short run the following inputs may be relevant:

1. This week’s high/low prices were 548/168 for the NYSE vs 411/393 for the NASDAQ (Enthusiasm/Caution)
2. Friday’s percentage of advances were 85% for the NYSE vs 68% for the NASDAQ (Winners are less happy)
3. The weekly AAII bearish sentiment increased to 31% from 25% the prior week.
4. Financial Services shorts as a percentage of float saw Franklin Resources* at 8.5%, FactSet at 6.0%, T. Rowe Price* at 4.6%, Raymond James* at 4.2%, Regional Financial at 4.1%, and the sector at 1.9%. (*held in personal accounts, unhappy          near-term)
5. Ruth’s indicator, the size of the Vogue September issue, is the biggest month for high fashion advertising, perhaps like the lipstick indicator. (The closing of Western shops in China is further proof of the expected global recession, or worse.)

 

Longer-Term Indicators

1. The White House is preparing to introduce a Corporate Alternative Minimum Tax (CAMT) of 15%, which is unlikely to pass the next Congress.
2. Both Presidential candidates are pro inflation in action, if not in words.
3. A front-page WSJ article titled “As Berkshire Hathaway* Rallies, Its Looking Too Rich to Some”, is an example of poor research. Warren Buffett has repeatably stated that he is not running the company for the present shareholders, but for their heirs, which is far beyond his 93 years. To my mind, the GAAP published numbers are misleading considering the SEC’s regulations. The value of a stock is an elusive intrinsic number. The most difficult part is the private value or current price of the 60 odd companies Berkshire owns, which are carried at purchase price plus dividends paid to Berkshire. To the right buyer, the aggregate eventual price for these companies is worth a multiple of their carrying value. (“Intrinsic Value” was a concept that I learned from Professor David Dodd, who authored “Security Analysis” with Ben Graham. This is probably the reason I and some of my accounts own the stock. We own the stock for its eventual value to our family.)
4. The world is in stages of a slowdown or a recession, with both the US and China suffering. Always treating China as an adversary inhibits our access to the Chinese market and their skills, preventing us from reaching our potential. (I don’t have a suggestion on how to conduct this rescue effort. It is like training a dangerous animal).                                                                                                                                         

 

Conclusions:

There will always be bear markets, which often precede recessions and infrequent depressions. Since we haven’t had a recession in a long time, one is likely coming. Particularly considering the political class’s stock optioned business management and the gift of a highly valued dollar compared to other deficit currencies.

 

The key question at the moment is when we will see the next INCREASE in INTEREST RATES and INCOME TAX RATES, which the Fed will follow.

 

Key Question: What is Your Bet as to When?

 

 

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

Mike Lipper's Blog: Investors Focus on the Wrong Elements - Weekly Blog # 853

Mike Lipper's Blog: Lessons From Warren Buffett - Weekly Blog # 852

Mike Lipper's Blog: Understand Numbers Before Using - Weekly Blog # 851

 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.