Anticipation Pays; Deliveries May Not - Weekly Blog # 907

 

 

 

Mike Lipper’s Monday Morning Musings

 

Anticipation Pays; Deliveries May Not

 

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

 

 

Since last December the bulls have been calling for a drop in the Fed interest rate. Some anticipated an interim pay-off near the close on Thursday when the last print on the 10-year yield failed to maintain its announcement high, fulfilling the dictum of selling on the news. The number of Friday’s declines on both the NYSE and NASDAQ were above the number of rising prices.

 

With the much-expected rate cut I found it interesting that the sample surveys of the American Association of Individual Investors (AAII) were bearish for the last three weeks. The six-month projections stayed in the 40% range for all three weeks (42.4%, 49.5%, and 43.4% respectively). In the latest week, which probably did not benefit from Thursday’s rate cut, the bullish estimate of 41.7% was slightly below the bearish call.

 

The explanation for the three main market indices rising to record levels from their April lows this week was the familiar “FOMO”, fear of missing out. I suspect traders sharing that impulse were largely housed in retail-oriented wealth management arms of brokerage firms and non-trust departments of banks.

 

The battle for investment survival is being waged by armies marching under the “FOMO” banner, as well as others withholding their purchase orders upon reading the economic data. There are two ammunition arsenals safeguarding the non-buyers, the declining number of job-openings and the rise of non-US traded equities benefiting from the fall of the US dollar. In April there were 158,000 jobs added, which fell to 22,000 in August. Barron’s shows the investment performance of 14 local markets in Europe and Asia each week. This week Europe had 4 risers and Asia 8. Asian and Emerging Market funds were most prominent among the better performing mutual funds this week.

 

On a longer-term basis there are a number of worries about investing in US markets:

1. The US market is becoming more speculative, with year-over-year NYSE share volume rising 16.24% and NASDAQ 68.97%.
2.  The current administration appears to want to reduce the independence of the Federal Reserve.
3. The President and SEC are floating the idea of switching from quarterly reporting to semiannual. Both ideas will make foreign-traded issues more attractive than they are now.
4. The drive to include non-publicly traded securities in retail accounts, particularly retirement portfolios, is expected to increase the risk of losses.
5. The London edition of the Financial Times devoted a full page to the headline “A new era of McCarthyism?”, showing a picture of President Trump and the late Senator McCarthy. This reminds me of sibling rivalry between an older brother and a successful younger brother. With a number of listed London exchange stocks moving to the US there is risk to a portion of the London market.

  

With the US stock market indices but not the average shares at record levels and the economy open to question, please be careful.

 

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Mike Lipper's Blog: Selected and Casual Road Notes - Weekly Blog # 906

Mike Lipper's Blog: Bad Comparisons Can Lead To Faulty Conclusions - Weekly Blog # 905

Mike Lipper's Blog: Appeals Court Rules (7vs4) Against Trump, but Life Goes On - Weekly Blog # 904

 

 

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Selected and Casual Road Notes - Weekly Blog # 906

 

 

 

Mike Lipper’s Monday Morning Musings

 

Selected and Casual Road Notes

 

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

 

 

In London on a visit with Mount Vernon Ladies Association.

1. PNC buying a Colorado Bank signifies that it needs more assets than it can reasonably produce operationally.
2. Long-term, the fixed income swing in wealth management accounts is bullish for equities.
3. The value of information is more than its accuracy.
4. Nitrate risk in Iowa and other states is a big problem for the farm community.
5. In the UK, a cartoon referred to Andrew Jackson as King Andrew. He was the first of our four activists Presidents. The other three were Teddy Rosevelt, FDR, and now Trump. Each tried to materially change the financial structure of our society and fought with the courts, which may have hurt more than it helped.
6. The British Empire was based more on global trade than military strength. With that as a thought, allow me to present a very controversial goal which will be very difficult to create. The US and China should form a common market as the two largest markets. Both countries have disciplined labor, science, and leadership based on corporate skills.
7. Adam Smith’s Wealth of Nations was read by William Pitt, the younger. His leadership may have been a major contributor to British economic growth after 1776.
8. Through Thursday, the year-to-date average performance of US Diversified Equity Funds was +12.70%. Only Large-Cap Diversified Growth funds did better. However, a large number of equity fund averages were better, mostly technology and overseas investments. Five fund peer groups produced rises of more than 30%: Global Precious Metals +98.46%, Latin America +36.75%, China +32.84%, International Value +31.69%, and International Multi Cap Value +30.94%.
9. The AAII survey sample of six-month projections showed 28% being bullish and 49.5% bearish. These are close to extreme results.

 

Conclusion

Too much attention is paid to the short term, with media commentary often having a negative slant. There clearly are risks, with our current activist president paralleling the 1929-1932 period, where FDR accidently turned a recession into depression. Even so, the long-term for our descendants could be quite attractive, eventually.

 

 

 

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Mike Lipper's Blog: Bad Comparisons Can Lead To Faulty Conclusions - Weekly Blog # 905

Mike Lipper's Blog: Appeals Court Rules (7vs4) Against Trump, but Life Goes On - Weekly Blog # 904

Mike Lipper's Blog: What We Should Have Been Watching? - Weekly Blog # 903

 

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Bad Comparisons Can Lead To Faulty Conclusions - Weekly Blog # 905

Mike Lipper’s Monday Morning Musings

 

Bad Comparisons Can Lead

To Faulty Conclusions

 

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

 

 

 

Your Portfolio vs. Stock Indices

The biggest trap the media and sales community set for both institutions and individual investors is comparing portfolio performance with a stock index constructed by a publisher. The best US stock market index is probably the S&P 500 Composite (SWX is its symbol).

 

The index is published by Standard & Poor’s Global (*), whose components are selected by data analyst editors, not investment managers. In a performance year where a company splits into two or more publicly traded stocks; the index carries each component of the former stock for the performance year. That is why the SWX measures slightly more than 500 stocks at times. Additionally, almost every active investor’s portfolio contains some cash or similar instrument. In periods of large gains or losses, the performance of non-equities will affect the performance of an account, but not the index. Furthermore, it is extremely rare for an active portfolio to own anywhere close to 500 names.

(*) Owned in client and personal accounts

 

In measuring the performance of the SWX, the measurement compares the closing trade price of the prior trade date to the ending price of the current day. It is extremely common for the ending price to be higher or lower than what an investor receives, so the actual performance of an active account is likely to be different than an end price calculation.

 

The management committee of the Wall Street Journal and the Standard & Poor’s editors have decided that SWX will only contain stocks that are listed on US stock exchanges. They also do not limit the percentage size of holdings in the composite, while the SEC limits diversified mutual funds to holding no more than 5% weighting within the portfolio of any given stock at cost (not market). Non-diversified funds are not restricted this way.

 

In today’s world, managed accounts are almost certain to hold cash or fixed income instruments as redemption reserves. Additionally, opportunity reserves will in many cases include non-US listed securities.

 

Many years ago, for these reasons, we convinced a number of outside directors of mutual funds to compare the performance of their funds to similar portfolios of funds. I believe this is the way almost all investment accounts should be measured, whether they are funds or not.

 

Other Mis-labeling

Last week, three of the five leading large-cap stocks were labeled financials; JP Morgan Chase (*), Morgan Stanley(*), and American Express(*). None of the articles I read mentioned that Charles Schwab(*) was the fourth largest declining large stock on Friday. Clearly, Schwab has something else going on that the first three do not, despite sharing the same industry label.

(*) Client or personally owned

 

Also last week, there was no mention of various countries whose local market indices showed gains, Europe 6 and Asia 12.

 

Another example of incomplete labeling was a headline of Goldman predicting that “Gold will hit close to $5000, if Trump undermines the Fed”. Perhaps true, but other commodities and some foreign stocks may do just as well. (Coincidently, a strategic collaboration between Goldman and T. Rowe Price to create a range of public and private investments was also announced. As a part of this collaboration, Goldman will invest $1 billion in open market purchases of T. Rowe Price stock.  Perhaps the more important message, is that Goldman believes the market is not offing enough diversity.)

 

Question: What are your thoughts? 

 

 

 

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Appeals Court Rules (7vs4) Against Trump, but Life Goes On - Weekly Blog # 904

 

 

 

Mike Lipper’s Monday Morning Musings

 

Appeals Court Rules (7vs4)

Against Trump, but Life Goes On

 

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

 

 

 

All of us were unprepared

The “Founding Fathers” designed our government to protect the minority against the majority, with the courts ruling on critical decisions. Now that the future of tariffs rests with the courts, I suspect The President will push for a quick decision.

 

I would hope at the end of judgement day we will have answers to two of the motivating drivers behind The President using tariffs to force discussions with both Congress and foreign countries.

• The first is “Non-Tariff Trade Barriers”, which may be larger than the size of the reciprocal tariffs, which are policies the importing nation forces on the exporting nation. The prohibition of certain fertilizers on imported food elements, or various power constraints on mechanical equipment or transportation vehicles are examples. There are a multitude of restrictions like these imposed by national or local governments on people’s taste buds. In total, these restrictions may very well be enormous in aggregate.
• The second issue is the use of the money generated by the tariffs. (It is well worth remembering that for more than a hundred years, tariffs were the main source of funding for the US government.) Economically, tariffs are a tax on the society. However, it is not clear whether the funds raised will fall under the control of the Internal Revenue Service (IRS) or some other instrument of government. The funds raised may potentially be used to reduce the existing deficit, pay for the newly issued tax breaks, or paid out directly to consumers.

The answers to these questions are needed to solve the riddle of weather these tariffs add to or reduce inflation. The independence of the Federal Reserve Bank is therefore a critical factor in dealing with the tariff issues. Many feel the Fed controls short-term interest rates and influences intermediate-term rates. However, it is not that simple. In an article by George Calhoun in Forbes, he lists recent experiences where the Fed lowered rates while the markets raised them. One of the reasons rates rose is the dollar declined or was expected to fall. George Calhoun is a professor and fellow board member at the Stevens Institute of Technology.

 

The commodity markets are keenly conscious of inflation expectations. This week commodity futures rose, led by natural gas +2.64%, gold +1.21%, and copper +1.01%. Another way to play the same trend is in the stocks of the commodity producers, which are owned by specialty funds. Specialty precious metals funds rose +2.70%, China funds +1.31%, Agricultural funds +1.30%, and Base Metals funds +1.12%. While the Courts will decide on the appropriate questions, the markets will collectively reward those who guess right regarding the direction of prices.

 

Please provide any thoughts that might give me a clue on how to avoid losing money and perhaps make some.   

 

 

 

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What We Should Have Been Watching? - Weekly Blog # 903

 

 

 

Mike Lipper’s Monday Morning Musings

 

What We Should Have Been Watching?

 

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

 

 

 

Lessons from the racetrack and life

At any given time, humans tend to congregate around what is most important to them or what is going to happen. These topics are labeled favorites, both at the track and by psychologists. On any given day at the track favorites win a minority of the races. More importantly, when favorites win the payoffs are relatively small, as the winnings must be shared with a large number who have reached the same conclusion.  Thus, backing the favorite is a low return game.

 

The problem in going with the less popular is their winning ratio is lower, as most people bet on the favorites. Thus, in terms of frequency, favorite betting wins.

 

There is a more rewarding goal, winning more money over time with less frequency but higher returns. This is the choice I learned at the track and apply to investing in securities.

 

This Week as an Example

Using the public media and limited public conversation, their favorite investment topic was the speech by Fed Chair Jerome Powell at Woods Hole, the implication of which was a cut in short-term interest rates. While most investors believe these are probably the most important questions to be asked, I believe there are more important questions with higher, longer-term implications. These can be grouped under labels of concentration and valuation.

 

Concentration

Much has been written about the amount of money invested in seven or ten largely technology/financial stocks. One study shows that the ten most popular stocks in the S&P 500 represent 38% of the total value of the entire index. On average, the ten largest market caps in the index between 1880 and 2010 represented only 24%. However, I question the math or source because railroads represented 63% of the stock market in 1881.

 

This observation is of particular interest to me as a graduate of Columbia College. Around 1880 Columbia had an endowment account restricted to investment in the most secure stocks. You guessed it, lawyers restricted the investments to railroads!! This particular endowment was to be spent on bricks for the campus. Thus, for many years all of Columbia’s buildings were brick faced.

 

There were many important implications that should have been drawn from this case, especially since every single railroad went into bankruptcy years later. However, if you had included political analysis along with legal analysis it was obvious railroads had become too powerful in the country.

 

In terms of political analysis and understanding how the US works politically, people should read a new 856-page book written by Bruce Ellig, a good friend of ours. The title of the book is “What You Should Know about the 47 US Presidents”. The book devotes a chapter to each President, covering the most important laws and regulations of his term. Included in the book is information about the President’s life and personal activities.

 

Valuations

John Auters of Bloomberg believes “valuations are extreme”. Prices in terms of sales, earnings, book value, and dividends are at a stretching point. In a recent survey of intuitional managers, 91% believe the US market is overvalued and 49% believe emerging markets are undervalued. Some 60 years ago I worked for a research-director who believed shipments of boxes were a good economic indicator. They probably still are, and that is why I took notice that they were down -5% in the second quarter.

 

With the federal government pushing to let retail investors participate in private capital transactions, particularly private equity, the health of the market for these longer-term, illiquid investments, could impact the listed market. There are approximately 3100 positions in private capital firms that are unsold. Their retail owners may not see the level of distributions they were expecting, which could unfortunately increase the volume of listed securities to be sold.

 

Long-Term Horizons:

 In the long run equity investing can generate very attractive returns. A dollar invested in the 1870 equity market by the 25th of July would be worth $32,240 in nominal dollars before taxes this year.

 

 As often said, history does not repeat but often rhymes. There are a number of parallels with the market crash of August 1929 to November 1936, and the economic depression that followed from February 1937 to February 1945, which will be discussed in upcoming blogs.

 

 

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Mike Lipper's Blog: DIFFERENT IMPLICATIONS: DATA VS. TEXT - Weekly Blog # 901

Mike Lipper's Blog: Rising Risk Focus - Weekly Blog # 900

 

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The Week That Wasn't - Weekly Blog # 902

Mike Lipper’s Monday Morning Musings

 

"The Week That Wasn't"

 

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

 

 

 

History or Not

TWTWTW (Was the abbreviation for "That Was The Week That Was". The British had a somewhat comical review of critical news, with jibes at our doings or non-doings. In a number of ways this past week was one of increased anticipation of the steps toward smoothing out some of our problems. The most critical was a cease fire in Ukraine, which would be a step toward ending the killing in that war torn country, and would also influence global economic trends. These results were expected to lead to more sales in the US and abroad, allowing the Fed to lower interest rates.

 

At the so-called summit in Alaska the two antagonists spent three hours restating existing positions but found only some unannounced agreement on how to reach a ceasefire.

 

At the same time a collection of US central bankers met to discuss economic policy, which to most of the public was encapsulated to mean changing the short-term Federal Funds rate. The official topics to be discussed were demographics, productivity, and immigration’s impact on changing the US job market.

 

Some available data points indicate that early in the next century the US population will peak. Long-term labor productivity is largely driven by education, beginning at the earliest school and home days through the graduate levels. Education is lacking appropriate leadership and funding. In the past, immigration brought us hard-working, intelligent people, a trend that could now be reversing.

 

What is the Data saying?

The following are some data points I am reading, in no particular order:

1. This being an investment blog it is important to note that the bottom of the US stock market occurred in 1929, before depression analysis officially began. This suggests the stock market may be an early warning signal.
2. The "Taylor Rule" predicts the Fed funds rate. It states the current Fed funds rate of 4.5% should be 5%.
3. Deere reduced its revenue estimate. Farm income was in a recession before the depression, and it was one reason for passage of the Smoot-Hawley Tariff. (I believe one reason the current Fed has been reluctant to lower interest rates are the many smaller midwestern and western bank loans and the feelings of their senators. Jamie Dimon is also concerned that it is difficult to quickly take over community banks under present rules.)
4. Jerome Powell is looking at the impact of tariffs on business services excluding shelter, which appears to be rising faster than other measures of inflation. In the month of July business services rose 1.4%.
5. Over the last 3 weeks the AAII sample survey’s bearish projections have risen to 46.2% from 33.0%.
6. Each Saturday The WSJ measures the prices of 72 items. In studying the data, I have noted that the single largest gainer or decliner often results from an unusual market factor. Consequently, I look at the second biggest gainer or loser and look at the spread between the two. In the latest week S&P 500 Health Care rose +4.62% while Comex Gold sank -3.00%, a spread of 7.62% which looks normal.
7. In the week ended Thursday, the best performing mutual fund peer groups were those unpopular for most of this year. (This suggests for the moment that there is safety in unpopularity. If you are looking for the best odds, bet on a material change. All three of the small company categories: growth, core, and value show promise.

 

Working Conclusion

Beneath the surface there is a lot happening, both in the long-term (the next century) and from a trading viewpoint. One should pay attention to quiet markets.

 

 

 

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DIFFERENT IMPLICATIONS: DATA VS. TEXT - Weekly Blog # 901

 

 

 

Mike Lipper’s Monday Morning Musings

 

DIFFERENT IMPLICATIONS:

DATA VS. TEXT

 

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

 

 

School Solutions

As taught academically, the critical pivots in teaching both economics and security analysis are the numerical changes of a data series. However, as a long-term investor I am much more interested in the mood changes hinted at in textual renditions. While data precisely represents the past, text allows the reader/student to think about one or more different futures. This is why I believe philosophy or similar courses should include both economics and security analysis in their teachings.

 

Below is a brief listing of several data points describing last week (Implications italicized and discussed in parenthesis).

• Year-to-date Stock Transaction Volume: NYSE 7.11% vs NASDAQ 37.30%

(Five times greater in the younger, more speculative market, even if some of the NASDAQ is inventory swapping among dealers. Speculation normally leads to extreme up and down prices)

• Inflation Signals: The ECRI Index tracks industrial prices weekly and it normally moves gradually. Last week it rose +1.70%.

(I believe this was in response to the tariff news at the end of the week. Some market participants believe there will be industrial price increases soon).

• Participants in the AAII sample survey are increasingly worried about a down market in stocks, but others are not.

(Comparing the bullish and bearish projections of last week with those 3 weeks earlier. Bearish projections rose to 43.7% from 34.8% 3 weeks earlier. Bullish bets only rose to 34.9% from 33.6% for the same period, suggesting bears see reasons to be worried while bulls do not. Only one will be right over the next six months.)

• Equity mutual fund peer group averages +10%. Only one US Diversified Fund (USDE) peer group average has generated returns exceeding 10% year-to-date, multi-cap growth funds. Forty other peer groups have generated returns exceeding +10%, although they were less diversified.

(USDE Funds hold more assets than the other peer groups, which suggests being a holder of US equities was not a winning hand for most.)

• Investors need to be careful that the earnings reported are not accounting constructions. The London Stock Exchange Group (LSEG) and I.B.E.S. estimate that the S&P 500 Index will report a +8.3% gain for the 3rd quarter. However, they further estimate that corporate net income will rise only +6.3% for the quarter. Thus, 24% of reported earnings will be attributable to buybacks and other accounting techniques.

(Investors need to understand what they are paying 20x-earnings or more for. Hopefully, operating earnings can be repeated while earnings created through accounting cannot.)

 

Conclusions:

There are lots of reasons to be cautious. Some reserves should be considered a hedge for future down markets. However, this hedge should be viewed as a temporary buying reserve until prices more appropriately reflect the long-term value of accepting normal risk.

To aid future generations of investors as well those today, security analysis and economics need to be taught with a fuller understanding that it rests on the strength of ever-changing language.   

 

 

 

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Rising Risk Focus - Weekly Blog # 900

 

 

 

Mike Lipper’s Monday Morning Musings

 

Rising Risk Focus

 

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

 

 

 

                 

Friday’s Four-Letter Word

In polite society we are encouraged to limit the use of four-letter words. This could be the reason we try to not use them in the financial world, which is a disservice to our performance analysis and investment achievements. Thus, I am dedicating our 900th blog to articulating the key to our investment survival, risk.

 

Risk is the penalty for being wrong, although it is also critical to winning. Without risk there would probably be no rewards for winning. As Lenin said, “There are decades where nothing happens; and there are weeks where decades happen.” It is possible last Friday was one of those weeks. After an extended period of “melt-up” from mid-April, stock indices, driven by a minority of their stocks, fell by large single digits or more. The media attributes the decline to employment.

 

Employment

Employment encompasses both large and small numbers of people, including us. The impact of employment is much broader than the number of people being paid to work, it influences both production and sales. (In the modern world published data does not include people who work without pay. Furthermore, there is no published data on the quality of the work done, nor the quality of those who wish to be hired. For current employers with open job positions, it is the absence of the last unknown factors which raises serious questions concerning the likelihood those open slots will soon be filled.)

 

One problem with the employment data is that only about 60% of the organizations report their numbers to the government on time, catching up in subsequent months. Thus, adjustments are normal. The current period includes the fiscal year ends for state and local governments, end of teaching year, and the federal government shrinking its totals. Regular users of this data probably understand these issues and adjust their thinking accordingly.

 

Bond Prices

Many businesses, governments, non-profits, and individuals generate insufficient revenue to pay for their purchases each and every day. To the extent they lack sufficient reserves of idle cash, they often borrow. Depending on their size and credit worthiness they will use the bond or credit markets. Unlike equity which has an indefinite life, bonds or credits have identified maturities. Consequently, the providers of cash are very focused on the short-term outlook of the borrowers. Each week Barron’s publishes a couple of useful bond price indices, consisting of ten selected high-grade and medium-grade bonds each.

 

Barron’s found another use for this data when they discovered that medium-grade bond prices rose more than high grade bond prices within a year of the stock’s price rise. Stocks decline when bond investors favor high-grade bonds. On Friday, high-grade prices didn’t move while medium-grade bond prices fell (yields went up). This is a negative prediction on the future of the stock market.

 

The negative view is understandable, many of these credits belong to industrial companies. Another source of information is the ECRI, which publishes an industrial price index which tends to move slowly. However, by Friday that index had risen 3.6%, which will increase inflation. (I assume it was the result of the announced level of tariffs.)

 

Questions

Has the Administration in their planning adjusted their expenses for the enforcement of tariffs? I wonder if we will see increased smuggling across our borders if the tariffs stay on for long? Are we increasing the Coast Guards’ budget?  How much will Scotch sales decline and Bourbon sales rise?

 

Please share your views.

 

 

 

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Melt Up Not Convincing - Weekly Blog # 899

 

Mike Lipper’s Monday Morning Musings

 

Melt Up Not Convincing

 

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

 

 

 

Contrary Evidence Also Not Convincing

 

Low Transaction Volume, High Chatter

 

Short-Term Implications

 

1. NASDAQ is breaking up. Up volume is leading, while more prices are down than up?
2. Industrial commodity prices rose during the week, 115.8 vs 114.98 the prior week according to ECRI.
3. AAII weekly bullish outlook is declining, 36.8%, 39.3%, and 41.4% over the last 3 weeks.
4. WSJ weekly down prices seem strange. The worst was Natural Gas -12.71%, but the next worst was a -2.82% negative return. This suggests there were few negative prices. Natural Gas prices remained volatile, being up +7.57% the prior week.

 

Possible Longer-Term Implications

1. Trump used construction costs for an already constructed Federal Reserve building to raise the costs of the new headquarters. Chairman Powell spotted it. Assume for the moment this was a honest mistake, it suggests that the President’s staff is lacking something. There have been similar mistakes, some of which were part of the reason the courts ruled against various executive orders.
2. Charley Ellis’ column on David Swensen in the Financial Times listed some of the reasons for Yale’s outstanding long-term record. A long-term focus meant less liquidity was needed and analysis went beyond financial statements to management policies, and well-placed alumni which wasn’t mentioned. I tried to follow his approach.
3. Most US Presidents have focused on managing the government and society as it was when they came into office. President Trump is the fourth president to make fundamental changes. (The others were Jackson, Teddy Roosevelt, and FDR.) Along with the other activists Presidents, the current occupant of The White House wishes to proscribe new ways of thinking to change our behavior. This is what our founders feared, the tyranny of the majority over the minority. Our Constitution and Bill of Rights have built in checks and balances. Consequently, I believe we are going to see more court actions for the rest of this term.

 

Implications?

I believe it’s going to be increasingly difficult to develop a long-term investment policy as we go through a period of attempted structural change.

 

What do you think?

 

 

 

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Mike Lipper's Blog: It May Be Early - Weekly Blog # 898

Mike Lipper's Blog: Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

 

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It May Be Early - Weekly Blog # 898

 

 

 

Mike Lipper’s Monday Morning Musings

 

It May Be Early

 

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

 

 

 

A Usual Trap

A classic mistake in making future plans is focusing mainly on the present. In search of an investment policy for the next few years or longer, one should look at the causes of the main trends, not the size of the tariffs that have been announced.

 

The key force behind the announcements on tariffs is Donald Trump. His background is one of complex negotiations evolved from materially different views of how he sees the present and the future. I believe The President saw a critical problem of unfair trading terms facing the U.S. and saw a way to change the terms in favor of the country. He saw a way to solve the problem through meaningful discussion with the powers on the other side. The key was getting the right people around the table.

 

The core elements of unfairness are to be found in non-tariff trade barriers (NTB) erected by commercial interests with official or unofficial government support. (A number of examples were listed in last week’s blog, copy available.) While there is no published total of each country’s NTB effects, some experts believe their impact is twice the level of tariffs applied.

 

Mr. Trump’s way of dealing with foreign countries is to make the host nation an ally by using the size of US tariffs as a hammer. This is the reason behind the high announced tariffs, which is where President Trump expects the real bargaining to begin. I expect negotiations with major trading partners to take most of the summer. We may never fully understand the various changes to NTB’s, but a good clue will be changes to US tariffs.

 

Clearly there is another element to the aggregate size of the final US tariffs, the amount of cash expected to be paid to the US Treasury. This needs to be meaningful enough to keep the growth of the annual deficit acceptable to an unknown number of Republican Senators.

 

Most of these should be settled in the fall and early winter, so they do not unduly impact the mid-term elections. The economic background to the elections may be influenced by layoffs and the administration’s attempt to expand the economy. Additionally, further international actions may be the cause of how some state elections turn out.

 

The current crosswinds shown below may also impact the level of markets during this period:

1. After a period of outflows, T. Rowe Price is cutting staff.
2. Freight railroads are growing from China to Iran and Spain, for US continental trains, and other trains from Canada to Mexico.
3. Tariffs may encourage smuggling.
4. The latest weekly American Association of Individual Investors (AAII) sample survey showed a 39% positive and negative 6-month outlook.
5. A study of structural bear markets shows the average breakeven to be about 9 years.
6. The critical operating problems facing the US government is no different than those facing commercial and non-profit activities, a focus on effectiveness, not efficiency.
7. Jaimie Dimon has shared the following thoughts:

• Tariffs will be inflationary
• US reserve currency status rests on military superiority
• Markets are not low
• Lessons can be learned from the turnaround of Detroit and problems created (and elongated) during the 1929 crash
• Dollar weakness helps US multinationals 

As usual, I hope you will share your insights on the various thoughts expressed.

 

 

 

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

Mike Lipper's Blog: Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

Mike Lipper's Blog: Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

 

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A. Michael Lipper, CFA

 

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Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

 

 

 

Mike Lipper’s Monday Morning Musings

 

Misperceptions: Contrarian & Other

Viewpoints: Majority vs Minority

 

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

                             

 

 

Every day through the popular press, pundits in or out of political positions express views that our current information will lead to a happy conclusion. Occasionally it will happen and contrarians like me acknowledge that it can and may happen, but the odds it will happen are only 30% to 50%, like the odds a favorite horse winning at the racetrack. By definition, the reward for winning will be the lowest of all horses in the competition. Contrarians can select a different horse with potentially higher rewards by choosing to wager against the majority.

 

Currently, it appears to this contrarian that it’s a particularly good time to take a contrary view of the intermediate period of the US stock market. The primary reason for this view is the bullish feelings presented in the popular press with such shallow thinking.

 

The US Stock Market is Going Up

The weekend press is full of similar statements because the Standard & Poor’s 500 Index (S&P 500) rose a small amount on Thursday. (This gain was given back on Friday when 390 S&P 500 issues declined. More significantly for the week, 54% of the stocks declined on both the NYSE and the NASDAQ.)

 

US Tariffs Announced

The President or White House Personnel announced import duty rates with a limited number of the countries, which in theory would slow the growth of the expected rising deficit. (The higher tariffs likely to be charged on exports from these countries is not known for an obvious reason.) The President is well versed on restrictions imposed on US exports by each trading partner, which are labeled as “non-tariff trade barriers”. These include the following list:

Administrative & bureaucratic border delays

Censorship

Foreign exchange & controls

Import deposits

Capital movement regulations

Licenses

Localization requirements

Standards

Quotas

“Voluntary” export restraints

 

I don’t know of any summing up of the cost of the above barriers, or others not identified. I have seen knowledgeable estimates that are roughly twice the size of the tariffs. President Trump started the whole discussion about tariffs to get high-level meetings with some of the “right” people around the negotiating table in order to deal with the “NTB” issues imposed by various individual countries. As this has not yet happened, I wonder if we have seen a final answer to both the tariff and non-tariff trade barrier issues.

 

Markets Are Not Waiting

Businesses and investors must execute global trades and make investment decisions every day in the absence of firm conclusions to these and other questions. The US dollar relative to other principal currencies has fallen about 12% in 2025, with more expected. This week, Barron’s quoted a participant saying, “The days of the world letting America live beyond its means are rapidly coming to an end.”

 

The Wall Street Journal (WSJ) publishes the price movements of various securities indices and commodity prices each Saturday. This current week 61% of the prices declined. It appears many purchasers of goods and services are not demonstrating an inability to act but are instead unwilling to transact under today’s conditions and outlook.

 

Please let me know what you are thinking.   

 

PS

Some of our subscribers may have known my brother Arthur, who passed away peacefully Sunday afternoon. He led a long productive life helping many people on both coasts and two oceans.

 

 

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

Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

Mike Lipper's Blog: Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

Mike Lipper's Blog: Inconclusive Week Hiding a Big Problem - Weekly Blog # 894

 

Did someone forward you this blog?

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

 

Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

 

 

 

Mike Lipper’s Monday Morning Musings

 

Expectations: 3rd 20%+ Gain - Stagflation

 

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

                             

 

 

 

 

3 ½ Day Trading Week

Normally, in a three and a half-day trading week we expect low volume and muted news of any significance to investors with less intense trading instincts and reduced staff levels. This was not the case this past week. Despite initial unruly Republican Party members in both Congressional houses, the so-called Big Beautiful Bill (BBB) tax and tariff bill passed with few amendments. Significant progress was made on reciprocal tariffs and possible trade barriers. Cease fire agreements in Gaza moved toward peace agreements. One suspects a Russian economic crunch, continued causalities sustained in the homeland, and the US threatening reduced US military aid to Ukraine, could hopefully lead to a reduction in deaths and soon become less of a distraction.

 

Trading Reactions

Led by favorable reactions to the passing of the BBB that were cheered on by The White House, many saw things getting better. These reactions stirred up bullish sentiments resulting in the S&P 500 Index reaching its first high for the year since February. Some even suggested 2025 could be the third +20% gain year in a row, a rare event.

 

Professional analysts and experienced economists are two-handed thinkers who don’t receive the same air or face time that advocates of simple tales do. First, the S&P 500 is a capitalization weighted index with a small number of highly valued stocks recording bigger gains than the average stock. An equally weighted index gained 5% less than the S&P 500. More importantly, at least to me, 9 of the 11 industry sectors in the index underperformed the overall index, with Info Tech and Communications doing better.

 

Economists often turn to the actions of corporate leaders for clues as they feel the stock market is too volatile and occasionally wrong in direction or magnitude. Currently, slightly less than half of publicly traded companies have announced employee layoffs going forward. Considering the cost and time spent getting qualified employees, cutbacks are an expensive strategy companies would like to avoid. Part of their problem is that they can’t find qualified new employees today, which means it is particularly painful to let good ones go. This is particularly true for companies with an aging workforce.

 

The lack of success in finding good new employees while keeping the better aging ones is in my mind not a cyclical problem cured by higher sales levels. It is a secular problem caused by the system we have built, which has failed us by confusing education with schooling. The problem starts in the home, often due to a single adult household, and continues on through early childhood education. The impact is felt all the way through PhD studies, with a system awarding promotions through test taking rather than productivity and intellectual integrity.

 

Historical Lessons

Perhaps we can learn from the past. With that thought in mind I recommend reading this week’s Barron’s article titled “The Coming Stagflation Won’t Feel Like the 70’s” by Joseph Brusuelas. I believe there is another parallel that should be considered, the US with an activist President and an accommodating Congress. Both the current occupant of The White House and FDR came into office seeking to make fundamental changes, but both ran into opposition from the courts. FDR took a recession and turned it into a depression, not by choice but in part due to the impact of stagflation. I do not necessarily agree with Joseph Brusuelas’ statistical projections.

 

What do you Think?      

 

 

 

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

Mike Lipper's Blog: Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

Mike Lipper's Blog: Inconclusive Week Hiding a Big Problem - Weekly Blog # 894

Mike Lipper's Blog: We may think we manage time, but time manages us - Weekly Blog # 893

 

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.