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?

 

 

 

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

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

 

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A. Michael Lipper, CFA

 

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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

 

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 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

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?         

 

 

 

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

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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A. Michael Lipper, CFA

 

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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.

 

 

 

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

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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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.