The Rhyme Curse -Weekly Blog # 838

 

         

Mike Lipper’s Monday Morning Musings

 

The Rhyme Curse

 

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

   

       

   

^{Analysts, lawyers, and accountants spend much of their careers relying on history to protect themselves and their organizations. I have often said, cut an investment analyst and a historian will bleed. Mark Twain is incorrectly identified with the following quote “History does not repeat itself, but it rhymes.”  To select the most useful rhymes, you should select from all past observations as an “AI” search would do, rather than just using the most useful observations. For example, in reviewing the number of years between the S&P 500 “all-time highs”, including 1929. There were 15 such occurrences, but they were of different durations: 25, 6, 5, 3, and 1-year durations). The most common period was one year, with 6 out of 15 periods being 1-year durations. In attempting to pick a relevant number of years, you should look at other factors. I would pick periods of rising government deficits. The center of this array is 5-6 years, suggesting a cyclical recession and possible periods of stagflation. A longer duration would imply a structural recession.}

 

^{Historical Inputs of Relevance Today}

^{In the 1890s US Admiral Alfred Thayer Mahon wrote on geopolitics and pointed out that Great Britain, a geographically small nation, was the real leader of the world due to its naval and commercial fleets. Both Germany and Japan got the message, which was fundamental in their preparation for WWI and WWII. China once had the largest fleet in the world, before they destroyed it themselves.}

 

^{The result of this seminal work was that once Germany was able to send its battleships through the Baltic to destroy British warships, WWI became a certainty. Prior to that the German General Staff, thru visits and other studies, had focused on the campaigns of General Stonewall Jackson in the Shenandoah Valley of Virginia, demonstrating the power of using mobility against fixed forces. After it’s treatment as an “ally” during the signing of the Peace treaty and the US curtailing its oil supply, Japan recognized the need for sea power, an issue which led to Pearl Harbor. Bringing the lesson and its probable impact on our future up to date. China has the largest naval fleet in the world today, and it is still growing while the US’s fleet declines.  China has almost half of the world’s shipbuilding capacity.}

 

^{Preparing for the Future}

^{The Capital Group, one of the great mutual fund and institutional investment managers, has entered into a joint venture with KKR to produce and sell hybrid funds. JP Morgan Chase, an organization that internally studies many possible futures, is prepared for interest rates between 2% and 8%. Their CFO is prepared for the tailwinds currently helping them to switch to headwinds.}

 

^{Many Different US Markets}

^{The only US Diversified Equity mutual fund sector to rise during the week through Thursday was large-cap growth funds, which was echoed by tech sector funds. While the NASDAQ advances volume rose for 4 days in the week, the NYSE Composite Index only advanced for one day. Low volume has led to less volatility.}

 

^{What Many are Not Prepared for}

^{The average age of world government leaders is 62, with 19% in their 70s and 5% in their 80s. The median age for US senators is 65, with the House member median age being 52. The average CEO is 56. While I hope all of our leaders are in good health and remain so, I suspect the emotional strain and lifestyle choices are incidental hurdles. As they age, they often become more conservative and prefer the old way of doing things.}

 

^{Investors are not prepared for change. I am currently noticing an increase in the rate of top spot replacements. Investors should therefore be prepared for leadership changes, which almost always result in younger and more vibrant leaders. There are other changes few are ready for, like a change in the Fed and other regulatory bodies, or a change in policies. I suspect there will be changes in private investments and how they deal with the public. As usual, low-risk equity and debt not designed to survive either stagflation or a major recession will come in late the.}

 

^{Let me know what investors need to be prepared for.}

 

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Mike Lipper's Blog: The Most Dangerous Message - Weekly Blog # 837

Mike Lipper's Blog: Trade, Invest, and/or Sell - Weekly Blog # 836

Mike Lipper's Blog: Secular Investment Religions - Weekly Blog # 835

 

 

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The Most Dangerous Message - Weekly Blog # 837

 

         

Mike Lipper’s Monday Morning Musings

 

The Most Dangerous Message

 

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

   

 

       

The Most Dangerous Message is one ignored. It appears most institutional and individual investors are doing just that and are being rewarded for taking increased risks. The worst one can say about a professional is that they were unaware of a potential problem. Almost every major disaster has had a tiny preview of a small event/planned rehearsal, or a curious outsider identifying a possible future action.

 

I recently noticed the following observations pointing directly to a future major decline in market prices. The observations are in no special order. Most important at this level of analysis is whether the expected coming recession is secular or structural. A structural recession is usually driven by the mistakes made by those in authority reacting to a secular recession, who then turn it into a structural recession as FDR did.

                  

 Observations That Could Predict Problems

1. Deere reduced its full year outlook due to soft demand for farm equipment. (In the 1920s many sectors leveraged their capital equipment expenditures. The farming sector was the first to “top out”. This caused many local farm banks to fail, which in turn strained regional bank resources. Today the farm sector is a much smaller percentage of GDP, and banks are better reserved. I wonder if AI expenditures could run ahead of derived revenues today, and more likely in the future.)
2. We are in a phase where numerous CEOs are being replaced. Others will likely follow, with many of the replacements wanting to establish themselves as effective change agents. This translates over time into massive spending. This week a new CEO of Vanguard was announced. Based on his history at BlackRock and a prior period with McKinsey he is likely to be a spender. The risk is that some of his new efforts, at least in the earlier years, will not be cash positive. JP Morgan Chase will likely be finding a replacement for Jaime Dimon’s twin roles. I wonder if the board will initially give her/him the same latitude Jaime earned. While Greg Abel has been promoted to the number two position at Berkshire Hathaway, he is much more an operator than Charley Munger, the former great number two. I suspect the new number two will move up to CEO, pushing some of the more than 60 chiefs of the operating companies to be more aggressive. While Goldman Saks’ stock is flying this year, the number of senior partners leaving suggests they are not a totally happy shop. It would not surprise me if David Solomon was to divide both the Chairmen and CEO positions within 5 years. (The securities of these companies are all owned for clients and personal accounts). While it is never wise to attempt to copy a successful investor, one can learn from some of their actions. Warren Buffet, an enthusiastic investor in Apple*, cut some of the number one holding in his portfolio. He is afraid of a sharp increase in capital gains tax rates and is not alone in having this concern. Others are additionally worried about income taxes, death taxes, and corporate taxes. Chris Davis, the CEO of Davis Funds, recently sold a portion of the group’s largest holdings, mostly financials. (I briefly worked for his dad when we were both at the Bank of New York). * Owned in personal accounts
3. This week there were approximately 3 times the number of index puts than the prior week, while the volatility index (VIX) was roughly 60% of what it was a year ago.
4. Only one stock market index fell out of the 32 indices produced by S&P Dow Jones, the UK Titans 50 Index. It only fell 0.30%.
5. The spread between the best and worst performing indices was much narrowed than usual, +2.97% vs -058%. Not much of an opportunity to successfully trade in what was thought to be a good environment after the indices hit record levels.
6. Industrial products prices on a year-to-date basis rose +5.66%, while employment cost gained +4.83 %. Perhaps the next stop is somewhere between the two.
7. According to the WSJ, since 2020 teachers have become more lenient, allowing grades to rise at the very same time test scores were dropping. This could be a contributor to productivity falling and the inability to find qualified workers. The military is also struggling to enroll needed forces.
8. China’s economy is rising at roughly twice the US rate.
9. Moody’s noted that opportunistic issuers took advantage of tight credit spreads. I wonder if rates rose while real fundamentals fell.

 

Please share the observations you think are important.

Notice to subscribers

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Mike Lipper's Blog: Trade, Invest, and/or Sell - Weekly Blog # 836

Mike Lipper's Blog: Secular Investment Religions - Weekly Blog # 835

Mike Lipper's Blog: Avoiding Many Mistakes - Weekly Blog # 834

 

 

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Trade, Invest, and/or Sell - Weekly Blog # 836

 

         

Mike Lipper’s Monday Morning Musings

 

Trade, Invest, and/or Sell

 

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

      

       

 

Every moment of our investment lives we accept the choice and risk of investing in equities, or alternatively accept the risk of not investing in equities. There are two valuable insights that may be helpful in reaching your investment posture.

 

The first insight rests on investment history. John Auters, a well-respected columnist now with Bloomberg wrote this week “History is clear it’s very, very dangerous to get out of stocks.” He was relying on data from Barclays using average annual returns for each component: cash, bonds, and stocks, covering the 20, 10, 5, & 1-year periods. The study showed stocks outperforming cash and bonds for each slice of investment history. This was not surprising, stock investors expected it.  What was surprising was the absence of a single 20-year period of losing money. This should provide some comfort to the two university investment committees on which I serve, as well as other long-term non-profits and those who supervise inter-generational trusts. (Due to a more strenuous history in the UK, a 23-year period will produce the same results as the US.)

 

When thinking of strategy, it would be prudent to remember the wise words of Jaime Dimon, the 20-year CEO of JP Morgan Chase, the most intensely managed global bank. He said, “We know we are going to be wrong”. (The key is recognizing the mistake and correct it.)

 

What about Bonds

We are on the verge of generating US Treasury yields of 5%+, with high quality corporates already at that level. Because of a hike in the Fed rate or some other driver, we may possibly be dealing with 2 - 30-year treasury yields reaching 5% or higher. If that were to happen it could harken back to the years when the retail market and some institutions plowed money into the “magic fives”, which attracted cash and/or redemption cash from funds, bank accounts, or the sale of equities.

 

With US Treasuries generally accepted as the safest investment vehicle, there was a rush to own them. Since 1928 there have been 19 years where yields on US Treasuries were negative. Not bad, 97 years with no defaults. (Mutual funds owning a portfolio of bonds continuously buy treasuries, so they don’t have a fixed maturity or a date certain when the holder will receive full payment of principal and interest, which the owner of the actual individual bonds does). Thus, there is low risk to the owner of bonds, which should be considered for a below equity return, with the odds suggesting a positive return.

 

Potential Worry List

There is an overabundance of favorable news from largely left media-oriented sources, with little or any balance. There is a need to identify what could go wrong. Some suggest the radio operator of the Titanic was too busy sending out congratulatory messages to receive iceberg warnings on its maiden voyage. (Is the list of worries analogous to the iceberg messages not received by the ship’s senior officers?) History suggests we could be surprised by governmental activities until the end of 2024.

• The feedback communications loop is getting weaker. Print advertisements are dropping at both the New York Times and the Wall Street Journal. One day last week the eastern edition of the Journal was reduced to one section, rather than the usual multiple sections. Major ad agencies are reporting weak advertising revenues. Much of the decline is probably a function of less advertising by the big box department stores, except by those closing branches.
• The shopping habits of lower income customers are changing, with lower priced merchandise replacing higher priced brands.
• Industrial product prices rose +1.87% last week after a period of little movement. On a year-to-date basis industrial prices have risen 3.56%. (I wonder if the long-term inflation rate will settle in the 3-4% range rather than the 2% level stated by the New Zealand central bank.)
• Some manufacturers have noted some of their customers building a stash of their supplier’s products, delaying sales by the producer. (I don’t know if this is due to past supply-chain issues and/or the customer hedging against future inflated prices. The second occurs more frequently in countries where short-term interest rates are high or not available.
• Revenue dollars are reported, what is not reported is the number of transactions. In some cases when unit growth is meaningfully below revenue, prices have likely risen, which is not likely to be a frequent event. (As an analyst trying to predict the future growth rate, I would reduce the future revenue growth rate. It is much more difficult to project the impact of future profit margin improvements. It may be wise to use a 10-year average, excluding any double-digit year.)
• The developed world needs more productive workers. April job creation in the US was the second lowest going back to at least January 2022. The US birth rate has been below the replacement rate for some time.
• Stock markets participants are sending mixed messages. Of the 32 weekly stock price indices published by S&P Dow Jones, 28 rose and 4 fell, with 3 being overseas and one domestic.
• The AAII sample survey shows 40.8% bullish and 32.1% bearish for the next 6 months. The bulls are much more volatile, their reading three weeks ago was 23.8%. Over the same period the bears declined from 35.9%.
• Transactions in the markets were also split. 35% of the volume on the NYSE fell, while 45% on the NASDAQ declined.
• In terms of the leading fund performance by sector. Though Thursday the utility sector led with +4.53%. The worst performance was generated by Indian Region funds, with a return of -2.77%.

 

Unlike the captain and crew, I am aware of risks and have a buying reserve and many holdings.

 

 

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Mike Lipper's Blog: Secular Investment Religions - Weekly Blog # 835

Mike Lipper's Blog: Avoiding Many Mistakes - Weekly Blog # 834

Mike Lipper's Blog: News & Reactions - Weekly Blog # 833

 

 

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Secular Investment Religions - Weekly Blog # 835

 

         

Mike Lipper’s Monday Morning Musings

 

Secular Investment Religions

 

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

   

       

Timing of Views

Apple announced its first calendar report this week, continuing a pattern of declining comparative quarters, albeit with a smaller percentage decline and slower sales of its latest iPhone model. Later in the week Berkshire Hathaway reported its first quarter results showing it sold 13% of Apple, its largest holding. During the Berkshire presentation I became increasingly concerned about the long-term outlook for US large-cap equities.

 

My worries were summarized in a column by Mohamed El-Erian for the Financial Times. He stated “tighter regulation, industrial policy, chronic fiscal looseness and internationally globalization has been giving way to fragmentation” as concerns.

 

Attending Berkshire’s annual shareholder meeting this weekend, I read a slide showing the major sources of the firm’s net operating income after taxes. One of the reasons to go to the meeting is that they report the results of the over 60 wholly owned and majority-owned companies in summary. In aggregate, their growth in earnings has slowed down or fallen. Most of these companies produce products and services used globally. Despite record domestic stock prices, it appears we are probably going to see an economic decline of measurable depth and magnitude. The questions that remain are timing and whether the decline is cyclical or structural. These questions forced me to examine the nature of these two remarkable companies presented this weekend.

 

Share Owners Create the Nature of Ownership

While management of the company largely dictates the nature of most companies, owners of the stock determine the nature of ownership of the stock. As both stocks are within ten percent of their all-time highs, there are very few losers in the stock. Both are multi product companies that provide services to both individuals and wholesale users. The companies have long outgrown their original set of products and services and their reputations allow premium positions within our society. While they have some competitors, they have no overall copycats. Their exact futures are not clear, although many users and owners have a great deal of faith in them, even though they don’t really know what their future will be. Without being sacrilegious, these two stocks have reached the point of being a religion in the secular world. Regardless of the existence of doubters and some heretics, it would take a major violation of the trust that has been established to destroy their faith in these two companies. (This has happened in the past, a couple of generations ago when the “Generals” were the secular religion, as in General Motors and General Electric, and many lesser Generals.)

 

Management Mistakes Admissions Help

Apple finally gave up on Project Titan (their car project). Elimination of their car project will allow Apple to conserve some needed talent. A complete car is a very different business and is not highly valued. Motorola lasted much longer, from its taxi and police car two-way radio in its early days to the semiconductor and early mobile phone years. On Saturday, Warren Buffet admitted he made the decision to sell Berkshire’s losing position in Paramount. While they were a supplier to Amazon, they didn’t buy the stock or another tech company until Apple.

 

Pulling the Thoughts Together Early

Revenue leverage in an inflationary period is unlikely to be maintained as a growth driver with small unit growth. Around the world, unit growth is decelerating. Productivity is also slowing because new hires are not as profitable as the seniors let go, even though juniors are initially paid less. However, lower pay expenses do not last long, as fringe benefits are more expensive, except for retirement. Retirees have not built-up enough savings to cover expenses in a non-work period. Productivity, where it exists, is driven by non-domestic born labor. Birth levels are below replacement needs and the education system is not producing ready, willing, and educated workers. AI gains, if delivered, will probably help the middle class but not the lower classes. The push for fewer working hours will create additional expenses and possibly social problems.

 

We need Berkshire Hathaway, Apple, and others to succeed for a healthy society around the world. Long-term it must be global, let’s hope it happens.       

 

 

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Mike Lipper's Blog: Avoiding Many Mistakes - Weekly Blog # 834

Mike Lipper's Blog: News & Reactions - Weekly Blog # 833

Mike Lipper's Blog: Better Investment Thinking - Weekly Blog # 832

 

 

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Contact author for limited redistribution permission.