WHO YOU SELL TO DETERMINES WHAT YOU BUY AND WHEN? - Weekly Blog # 646

 

Mike Lipper’s Monday Morning Musings

WHO YOU SELL TO DETERMINES WHAT YOU BUY AND WHEN?

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

This week showed the value of reverse thinking. Most investors choose what to purchase based on the perceived characteristics of the investment. They choose when to make the purchase based primarily on their own needs or possibly a headline event. This thinking has not produced profits over the latest two weeks.

Who to Sell to?

Basic securities analysis textbooks assume that investors sell to investors that think like them, which is long-term, although the eventual buyer may be another company in a merger or acquisition. One of the nice things about life and markets is that each year brings new people wanting to invest. Each generation produces young people wishing to get rich quickly, who believe that making smart decisions and acting very quickly pulls off that trick. (Wouldn’t we all like to find Eldorado, the mythical gold mine.) 

While sheltering in place the youth discovered their brokerage firms allow them to trade on margin (borrowed money). Stocks and bonds cost too much money and move too slowly, so they quickly discovered put and call options. Options normally expire worthless or are sold, but they can require delivery or acceptance of the underlying shares. To protect the sellers of these options they buy or short the underlying shares. During the last two weeks the market has become aware that in aggregate these options plus some owned by a large Asian fund group is huge. This is one of the explanations of the two-tier market we have been experiencing. 

The first tier is about ten stocks including a couple of Asian companies. Through the end of August these stocks gained much more than +20%. The remaining stocks, the second tier, is still down a few percentage points year-to-date. Our intrepid youth has concentrated their attention on these tech leaders in the first tier. Options are written for various time periods, from a day to multiple years. Most institutions using options typically hold them for one or two months, but these youth are often in and out within two days. A complicating issue is the belief that the equity underlying these trades, on both the buy and sell side, could be as low as 7%. This in and of itself is causing rapid trading on the other side of these transactions. Short-term traders expect the other side of their trades to be similarly motivated by short-term views. During the last two weeks this has been the added increment to the market, adding to both volume and probably much more to volatility.

The Time Hurdles

Politics

As I’ve suggested in prior blogs, we have entered an emotional trading period which can last until mid-November. By the end we will have the initial results of the election. For forward-thinking investors who know history, the impact of the Presidential election will prove to be less important than who will be the chair and probable ranking member of various Congressional committees and possibly sub-committees. It will be this small group that puts words to the President’s wishes. Based on history, campaign slogans will either be totally disregarded or so modified that the results will be very different than what voters perceived on election day. 

By January, I believe both political parties will be splintered into different groups on many basic issues. Committee chairs will not automatically be able to send their wishes to the “floor” of their house without some support from the ranking (senior) opposition member of the committee. While all members always think of their next election, the defeated party will be focused on how to reverse the past election and how to improve their own chances for the next election. The ranking member has less ammunition than the chair, as they aren’t able to appoint sub-committee chairs. Additionally, members from the minority party will undoubtedly be split as to the reason for their side’s loss in the last election and will blame some of the remaining party members. Thus, they will not be easily led. Their immediate concern will be the 2022 mid-term and regaining the majority in 2024, where the two Presidential candidates will likely be new to those roles. 

COVID-19

We are likely to get frequent reports on the progress of vaccine trials and therapeutics, which are not as much in the news but possibly more important in terms of the number of people treated. Personally, I am very concerned with the execution of production and distribution of these lifesaving or at least life altering medicines. These are very large tasks that frequently run into problems. 

Other News Elements Before 2021

• BREXIT + UK Economic Recovery Faster than Continent
• Some rising commodity prices affecting some consumer prices

Market Indicators

• Very few fund investment categories rose this week - precious metals, agricultural commodities, Japanese and European equities
• NASDAQ fell -11% from its all-time high
• Dow Theory has a buy signal (often late, but sometimes early)
• AAII survey sample increasingly bearish
• Used car prices rising

What Should Investors Do?

Traders should trade, but remember, they want to finish with cash in the end. Investors should sit through this emotional trading period unless the market moves 20% either way. If a specific issue has some unexpected news causing reinterpretation of the situation, perhaps some change might be warranted. In general, sound investors with good portfolios and not too much cash should use a 20% market gain to add to reserves. Investors should use a 20% market drop to look for new bargains, which will benefit quickly if the market adapts to new strategies. (One might consider long-term producers or transporters of natural gas, or companies whose revenues are tied to market prices.) 

  

 

     

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

https://mikelipper.blogspot.com/2020/09/turning-point-or-bump-weekly-blog-645.html

https://mikelipper.blogspot.com/2020/08/caution-ahead-emotional-turns-likely.html

https://mikelipper.blogspot.com/2020/08/mike-lippers-monday-morning-musings_23.html

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 - 2020

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.

Where is the Stock Market Going? ESG Might Learn from Columbus - Weekly Blog # 598

Mike Lipper’s Monday Morning Musings

Where is the Stock Market Going? ESG Might Learn from Columbus

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

CORRECT CONTRARIAN CALL SETS UP WARNING
In last week’s blog we expressed our contrarian view that the next move of the US stock market was up. On Friday afternoon the market shot up and was able to keep most of its gains by the close. Even when flipping coins, the odds of a trend continuing or reversing does not change. However, as a contrarian I am worried about being successively right. (In the early 1960s I was right in choosing specific stocks six times in a row; it ruined me in terms of the only real product of the stock market = humility. Hopefully, I have fully recovered.)

In addition to not trusting in a continuation of a trend, there are two signs that should sound some caution. The first deals with the difference in outlook of investors vs. speculators. In an over-simplification one could suggest that the bulk of the money invested in New York Stock Exchange stocks is for investment, while the bulk of the money invested in NASDAQ stocks is more speculative short-term. In the week ended Friday, the number of new lows on the NYSE was 147 vs. 302 for the NASDAQ.  Part of the reason for this dichotomy is that the focus of investment leadership may have changed. Using mutual fund performance averages for the week ended Thursday, before the sharp gain on Friday, the best category average return was achieved by World Equity funds +0.81%, which beat the return of +0.52% for US Diversified Equity funds. The average sector funds declined slightly -0.04%. Expanding the performance lens to the month of September, I looked selectively at the performance of some T. Rowe Price funds (*) to get a clue as to the future direction from the following list:

                            September 
Fund                       Performance
Financial Services            +3.36%
New Asia                      +3.15
New Era                       +2.66
Emerging Market Stock         +2.25
Growth Stock                  –0.99

The two leading sectors in the Financial Services fund were banks and insurance, both of which trailed earlier in the year. New Asia is heavily invested in China and India. New Era was a fund designed by Mr. Price himself, to serve as an inflation protected portfolio invested in energy and other commodity related issues. The Growth Stock fund is led by FAANG stocks and a small position in pre-IPO investments. I have hedged our larger positions in Growth Stock and similar funds with international funds, inflation sensitive funds, financial service funds and some stocks. The purpose of hedging is to have some relative winners when long-term, attractive growth stock investments, are experiencing difficulties in the short-term.

(*) Owned in our private Financial Services Fund and in personal accounts.

The second short-term factor is that the overall US stock market, as currently priced, is clearly in the middle of its valuation range. The following statistics are in general flat with a year ago:

                        Current     Year Ago
Indicator               Reading     Reading
DJIA Yield               2.20%       2.19%
S&P 500 Yield            2.00%       1.99%
Market/Book - DJIA       4.12x       4.09x
Market/Book - S&P 500    3.49x       3.35x
Consumer Prices         +1.74%      +1.74%
Inflation               +1.70%      +1.70%

Perhaps the most reassuring indicator is a contrarian one. The current American Association of Individual Investor's weekly sample survey has a bearish reading of 44%. As noted in prior blogs, readings over 40% are extremely rare. Three weeks ago this number was 33%, demonstrating its volatility.

SHORT-TERM WARNING
We may create an important barrier to future higher prices if within a reasonably short period we do not see record price levels with expanding volume.

• Some may view multiple attempts to achieve new highs as a sign of a market top after rising for more than ten years. 
• Many stock holders disappointed with the lack of progress in their particular selections may see the current price level as a good exiting opportunity. 
• From an analytical viewpoint, if the seller’s volume is larger than the buyer’s appetite, near-term prices will decline. I emphasize near-term because sellers are often sold out bulls, who feel compelled to re-enter the market regardless of price for fear of missing out (FOMO).

COLUMBUS DAY LESSONS FOR ESG INVESTMENTS BY INSTITUTIONS
Most Americans have been brought up to celebrate Columbus Day, “the discovery of America”. They are familiar with the story of Christopher Columbus who convinced the Queen of Spain to use her jewels to pay for his three ships. These ships set off to find a new route to India and found an island in the Caribbean instead. He is celebrated for his persistence and courage to go where nobody had reportedly gone before. Instead of this tale being taught in elementary schools, the real story should be taught in business schools, particularly in advanced investment and marketing classes. (The latter has to do with one of America’s great resources, the ability to sell myths.) The real story is very different than the one presented to children.

THE REAL STORY
Spain’s main competitor and neighbor was Portugal. The king of Portugal was known as Henry, The Navigator.  He funded a series of voyages along the African coast and eventually had one of his ships round the Cape of Good Hope at the southern tip of the continent. Later, his ships landed in India and he was able to set up the spice trade. In the time of no refrigeration spices were extremely valuable in Europe. They had learned from Marco Polo that the addition of spices preserved the taste of meat.

When Columbus was attempting to raise money for his venture, Spain was in the midst of the forced conversion or expulsion of Jews. Not only was the Inquisition expensive, but it wiped out much of the merchant class in the country. The Queen, recognizing the need to divert attention from the expulsion and poor state of its economy, found in Columbus a “pigeon”, or a willing accomplice.

Columbus today would be called a skilled marketer with a smattering of scientific knowledge. Most other explorative voyages were done with a single ship, not three. So, like most marketeers, Columbus overspent. He was not a good manager or leader, suffering a mutiny and the loss of one of his ships. When he landed he did not know where and what he brought back was of little economic value. But like a good marketer, he was able to raise funding for two additional voyages.

In one respect Spain got very little from its investment in the spice trade. However, Spain got a great deal from its discovery of gold and silver, in countries with weak militaries. Spain, along with Portugal, seized Latin America and parts of what is now the US. (Interesting enough, the smaller of the two occupiers got the biggest piece of South America, Brazil.) In some respects, the rest of Europe paid for Spain’s success. The gold from Latin America created two hundred years of inflation and shifted the political power bases within Europe. Perhaps due to inflation, other European countries avoided funding exploration and development directly, licensing private companies to do it for them instead. The Dutch and English were particularly successful, their effort lasting longer than that of the Spanish.

COLUMBUS AND ESG INVESTING BY INSTITUTIONS
ESG is a series of views for the protection and improvement of the world. ESG stands for Environmental, Social and Governance, which some investment institutions impose on businesses, not governments. They hope to shame, or through the use of proxies, force businesses to improve their conduct. These improvements include how companies treat the environment, how they interact with their communities and workers, and the composition their boards and management. They do not appear to be concerned with the cost of their actions, which will be felt by shareholders and customers. One example is the use of tax subsidies to lower the initial cost of electric cars. There is no concern that the electricity used, particularly in China, comes from burning coal to generate electricity, or that these vehicles will require fewer workers to build or maintain. This is not to say that ESG issues should not be addressed, but the total cost for all stakeholders needs to be understood and managed.

For proponents of ESG they should consider a possible parallel with the lessons of Columbus. Both Spain in its time and the boards of various fiduciary institutions today have looked for things that do not exist in reality:

• Both have spent other people’s money without the direct authorization of the beneficiaries 
• Both were exposed to some very successful marketing
• Both needed to focus attention away from a world of low returns
• Neither wanted to turn over development to private enterprise, with their history of frequent and periodic measurement, and audits
• Both appear to have been unconcerned with the consequences of their effect on others

This is not to downplay the need for answers to society’s problems, but there is a concern about the instruments being used.



Question: 
What are your thoughts about the short-term outlook for the market or the Columbus Day lessons?



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/10/contrarian-bets-and-other-risks-weekly.html

https://mikelipper.blogspot.com/2019/09/mixed-near-term-after-recession.html

https://mikelipper.blogspot.com/2019/09/capital-cycles-changing-weekly-blog-595.html



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 - 2019
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.