Mike Lipper’s Monday Morning Musings
Increase in Bearish News is Long-Term Bullish
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Another Term for History: Uneven Cyclicality
In describing the behavior of people and other animals the
terms of optimism and pessimism are appropriate, particularly the extreme
emotions in overcoming risks. These actions drive all kinds of markets,
including climates. Extreme increases and decreases occur irregularly, with
people forgetting the pain caused by collapses.
We may currently be entering a negative economic cycle,
possibly caused by an exaggerated political cycle. The biggest danger in focusing
on the probable down cycle is retreating from a continued effort to search for early
up-cycle clues.
A lawyer who practiced at a bank during the Great Depression
mentioned that he hired workers every day to work on bad loans. During this
period there were some activist investors who purchased defaulted securities, hoping
to hold them for a partial or full recovery of face value. Some of the more well-known
players were Ruth Axe, Max Heine, Ben Graham, and David Dodd, among others. Current
conditions are not yet at this level of pain, but some smart people are
examining the potential for such a period, both in the U.S. and elsewhere.
What is Happening Now?
Moody’s (*), in its latest proxy statement, predicted a
continued multi-year decline. PIMCO is reluctant to buy long-term US Treasuries.
Small and Mid-Cap stocks are dropping more than large-cap stocks on down market
days because there is only liquidity in large-cap trades. This suggests that
sizeable positions may have to be held until there is a sustained recovery.
(*) Owned in client and personal accounts
The two major consumer confidence surveys showed sharp drops
in their March reports. One long-term negative factor facing the US is the
relative unproductiveness of the entire educational process for investment capital.
In the public school system, the number of administrators has increased eleven
times the rate of growth in the number of students. (Sitting on a number
University boards I have seen the same tendency at their level.) The mental health
needs of the students have almost become a sub-industry. Many homes are not
effective educational sites either.
What are the Investments Prospects?
As someone who basically learned analysis at the New York
racetracks, I turn to the availability of numbers and ratios. Most dollars
invested in equities are for funding needs beyond ten years. Consequently, I am
using the median investment performance of the larger peer groups of mutual
funds for the last ten years, as shown below:
Large-Caps 8.50%
Multi-Caps 7.92%
Mid-Caps 7.57%
Small Caps 6.82%
International 5.19%
(I think the overall range of 8.50% - 5.19% is a reasonable compound
return for the next 10 years, considering the two years of 20% or more in the
last 10 years. However, I don’t think the rank order of the peer groups will
work out the same as it has in the past. Large-Cap performance is too heavily
dependent on a concentrated group of high-tech companies. Small and mid-caps
should benefit from buyouts and the movement of talent from larger companies to
smaller companies. International funds may be the beneficiary of reactions to US
government actions. I recently added Exor, the Agnelli family holding company, to
my personal portfolio.
With so many controversial views expressed, I am interested
in learning your view.
Did you miss my blog last week? Click here to read.
Mike
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