Mike Lipper’s Monday Morning Musings
Do Current Prices Lead Future Markets?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Lessons From the Weatherperson
With condolences to too many in the US and Europe this
weekend, no snow came down in Summit, New Jersey today. The purpose of
mentioning this is not to gloat, because we will have our share of bad weather
in the future. The purpose is to remind all of the lack of certainty in predictions,
and to remind all that the real value of weather-people is making professional
investors look good!
I have one advantage in the securities analysis game,
another title for predictions. My advantage is I learned analysis at the New
York racetracks. The first thing was to read the situation, which included the
conditions of each race and many other details. The purpose of this exercise was
to eliminate races that were difficult to analyze. For example, younger horses with
little to no experience, or a clear standout quoted at very small odds.
Remember, my prime objective was to leave the track with more money than when I
arrived, after expenses. A goal only a minority achieved each day. (This led to
never wagering all on any given race and having enough money to get home. Thus,
I am not fully committed in my current portfolio.)
The next task was to compare the records of the horses,
which usually produced horses with the most wins or fastest times. This
exercise normally produced a list with the smallest betting-odds, and they would
generally be excluded because the payoffs were relatively small. So much so
that they would not even cover prior or future losses. (This is like coming to
a highly favored stock in a late market phase)
With all these eliminations, what is left? What I found at
the track and later at my desk were bits of information in public view, suggesting
that on a given day a horse could do well and beat the more popular favorite.
(This was and still is my current hunting ground for investments.)
The Big Advantage
There is a big long-term advantage in selecting investments over
picking horses at the track. When the day at the track is over, the game
restarts the next time you enter the track. With investing in securities your
investment progress passes through a number of phases. I find it easier to pick
securities, which will have more up phases than down. The big advantage is that
after an up phase there is more at risk than what you initially put in. If
there are subsequent up phases, your returns are the product of your initial
investment plus the return on other people’s money. A study of the returns of
successful people captures this compounding impact.
Applying The Track’s Principles Today
Enthusiasm is the enemy of finding current bargains. Most
long-term investors, if they don’t get punished by high expenses, taxes, and
selling large portions of their wealth quickly, have a good record of growing capital.
However, if they get sucked into the market when most are enthusiastic about
its progress, they become victims when enthusiasm shifts. The greater the
number of transactions the greater chance they will not only have poor returns but
will lack the capital and the guts to buy when securities are cheap.
The 2026 Shift
One month is hardly conclusive that markets around the world
are expecting a different game, but the S&P 600 Small Cap Index led most
other US stock indices with a gain of +5.61% in January. (If that rate of monthly
gains were to continue throughout the year, the annual gain would be over 100%)
By comparison, if a January S&P 500 Index gain of +1.45%
continued for a year it would produce another double-digit return. The problem
is that it results in a four-year period of double-digit returns. (I suspect the
doubling of one of the small cap indices is more likely than a four-year period
of double-digit gains in the S&P 500 Index. Goldman Sachs calculated that if
only 1% of the capital invested in the S&P 500 moved to the S&P 600, it
would raise the latter’s price by 37%.) For perspective, of the 105 Mutual fund
peer group averages, only 8 were up double digits.
Now To The Real World
In the last 3 weeks the usually slow moving ECRI Industrial
Price Index came alive with successive weekly readings of 131.20, 126.28, and
117.67. The gain over all of last year was +11.50%. The three biggest price-increases
this week in The Wall Street Journal were Natural Gas +20.64%, ULSD (diesel
fuel) +12.16%, and Crude +6.78%. (I wonder what the present Fed and the
probable new Chairman after May will do.)
There are lot of other worrisome statics out there. In a
recent report Michael Roberts listed some 17 economic return elements that are
worth looking at. I have selected just a few of them for you to digest.
- Healthcare and social services generated more than 100% of net payroll gains in 2025. Top decile earners now account for about 45% of total consumption. (These top decile earners won’t be the beneficiaries of the tax changes in ’26.)
- Softer demand for luxury goods suggests financial stress is beginning to move up the ladder.
- Layoffs have reached recessionary levels and wage growth continues to slow.
- Creditors are increasingly unwilling to lend at historically low real yields.
- A recent PWC survey of 4000 global CEOs found that confidence in revenue growth had fallen to a five-year low.
Next Two Years
Odds are, the next two years will be anything but smooth.
The key to surviving this troubled period is maintaining capital in diverse
financial and other assets. Gather as many resourceful people as possible into your
circle. Stay alert and get comfortable with change. Lastly, share your thoughts
with us.
Did you miss my blog last week? Click here to read.
Mike Lipper's Blog: Failed Expectations: Do Details Count? Zig-Zag Flips - Weekly Blog # 925
Mike
Lipper's Blog: Is This The Week That Ends Instability? - Weekly Blog # 924
Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923
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