We are Never Fully Prepared - Weekly Blog # 845

 

         

 

Mike Lipper’s Monday Morning Musings

 

We are Never Fully Prepared

 

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

 

 

The Lessons of Saturday, July the 13th

One self-appointed mission of the weekly blog is to make subscribers aware of potential negatives absent from the content of various media pundits and financial sources. We are not predicting bad things happening but will offer some contrast to the regular diet of “happy talk” from most other sources. In evaluating the bulk of normal inputs, I think it is useful to consider the possibility that some things will not have happy outcomes.

 

Coming from my real educational experience at the racetrack, where the most favored horses win more often than those with longer odds. The betting returns on winning favorites are smaller than those of longer shots winning. Consequently, a sophisticated bettor will often have a smaller win vs loss record but will walk away from the track with more money by selectively picking horses with higher odds. However, betting on every non-favorite usually produces losses in aggregate.

 

To prevent such a result, one must be selective in taking high odds bets and avoid improbable long shots. Thus, I was totally unprepared for Saturday’s distressing news of an assignation attempt which caused two deaths, two wounded, and most importantly the near death of Presidential candidate Donald Trump.

 

As with many tragedies there are immediate losses and potential longer-term impacts. Luckily there was just one immediate death along with two seriously wounded casualties, as well the death of the assassin. Our hearts go out to the innocents.

 

The longer-term implications are possibly numerous and far reaching. Unfortunately, in America we have periodically had both failed and successful assignations of prominent politicians. Hopefully, we can rid our culture of these tendresses.

 

I do not know if the attempt on the President’s life will have any impact on his choice for Vice President. Furthermore, we don’t know if the American voters will change their choice for President this fall, or if it will have impacts on our foreign friends and foes.

 

The impact on me personally will be to focus on the possibilities rather than the probabilities in looking at the future.

 

Things that Could Change the future

1. The results of the weekly sample survey of the American Association of Individual Investors (AAII) are viewed by some market analysts as a contrary indicator. I find it useful in gaging the short-term views of this group of smaller investors. (The survey occurred prior to the assassination attempt on Saturday.) The change in the bullish swing over the last two weeks was almost twice as pronounced as the bearish swing, 41.7% to 49.2% (+7.5%) vs 26.1% to 21.7% (-4.4%), respectively. Perhaps more significant, the bull score was more than twice as large as the bear score (49.2% vs 21.7%). This could be the result of a difference in the makeup of the sample participants. A difference of this magnitude is an extreme condition and is unlikely to be maintained.
2. Too many investors believe the market can be understood by following the S&P 500, which is a collection of eleven industry groups that move quite differently from each other. Over the last ten calendar years the monthly low points of the eleven industry groups have rarely coincided.
3. The number-nerds have great faith in US government compiled data. In an article in the NY Times, which regularly has errors. The Times produced an article with the headline “US Economic Data Integrity May Be at Risk, a Study Finds”. The article quotes a study by the American Statistical Association proclaiming the risk of future errors increasing due to government departments and agencies being squeezed by budget issues, particularly due to the lack of funding for research. I remember this problem well. In the early 1960s I was a junior analyst assigned to tracking the steel industry. I reported to the Director of Research who came to the bank as an economist from the government. One day I went to him and suggested the steel industry data was worthless in guiding investment decisions. “How could that be, it came from the government”. I suggested the eight companies in the data file were quite different. Some had to ship their products many miles to customers while others had very little shipping costs, causing large differences. Based on this factor alone those companies were better investments, Chicago over Pittsburgh. I consequently created my own subsector groups for selection purposes.
4. The CEO of JP Morgan Chase was traveling on the day it released its quarterly earnings announcement. He usually participates and I felt his input could be more important than some short-term numbers.

 

Two Chinese Inputs Could Be Significant

1. Chinese troops are holding military exercises with Belarus on the Polish border. (I wonder whether this could be the result of Finland and Sweden joining NATO, and possibly Ukraine?
2. Later this month the Chinese are holding the 3rd Plenum, where the following topics may be discussed, with some yet to be determined:

a.  Can officials restore faith in the economy?

b.  How will officials look to forge China into a tech superpower?

c.  Do foreign companies have a future in China?

d.  How will China address growing geo-economic risks?

e.  Can officials fix the government broken revenue model?

f.  How will the Party respond to China’s demographic decline?

g.  How will China try to manage the great transition?

 

 

Are you prepared for the pace and depth of changes?       

 

 

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

Mike Lipper's Blog: What I See and Perceive By Observing - Weekly Blog # 844

Mike Lipper's Blog: Preparing for a Recession - Weekly Blog # 843

Mike Lipper's Blog: Understanding the Universe May Help - Weekly Blog # 842

 

 

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 – 2023

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Collateral Rewards, Risks, & Opportunities - Weekly Blog # 828

 

      

Mike Lipper’s Monday Morning Musings

 

Collateral Rewards, Risks, & Opportunities

 

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

   

 

 

Motivations

The attempt to be successful and original is hard work, as being an originator seldom leads to investment success. Better results come from striving to be an early participant in an investment idea. Great individual analysts search for a single great idea, usually an idea that few if any recognize.

 

Somewhat later and perhaps deservedly less successful are those who are early recognizers of those with great investment ideas or themes. The second group are collateral players, including public and private pundits working to identify these opportunities.

 

At one point in my professional life, I was a candidate for the first group. I devoted some of my time as an analyst to visiting plants, doing walking tours of workspaces, and attending industry sales presentations or government conferences. In order to accomplish these tasks, I often commuted on the earliest and latest trains. In addition, I also read numerous trade journals, which I no longer do.

 

Today, my “remote” research consists of reading or watching business communications, visiting buyside managers and their analysts, and walking through shopping streets and malls. In effect, my first glance at new products and services is when they are introduced to the buying public, so I am going to be late in recognizing new trends. The only offset I have is my prior experience, having seen many things in the past which may have some bearing on present and possibly future trends.

 

What Are Most Missing

Much has changed in the sixty plus years I have been watching.

1. Disclosure rules have changed.
2. Corporate executives meet investors and analysts in tightly scripted conferences or small meetings.
3. The published data is largely statistical in nature and is focused on the immediate past. Much time is spent on complaints about government restrictions and disclosure requirements. Two examples are the focus on demographics and worker counts. (This is the same trap political pools fall into.) A much more expensive and insightful source of useful information is psychographics, rather the demographics. While two workers may have the exact same job classification, one might be solely concerned about wages and hours while the other seeks career opportunities well beyond the current paycheck.

 

Questions Need to be Asked?

• What are the implications for the four largest net free cash flow producing companies, which reported over $50 billion each? This suggests to me that risk-taking finance and technology companies will be central to funding the future and could be its beneficiaries.

Net Free

Cash Flow

$ Billion

Goldman Sachs           $143 

JP Morgan Chase           87

Apple                     85

Google                    69

• The American Association of Individual Investors (AAII) is often viewed as a contrary indicator at turning points and last week the indicator switched direction. Those with a bullish outlook rose to 30.4% from the prior week’s 23.4%, while those who felt bearish fell to 41.4% from 53.7%. (The size of the switch and timing is unusual.)

• Lessons from the past for possible use in the future? In the 1930s the US shrunk its defense strength below its WWI level, while restricting oil exports from American companies to Japan. It also refused to permit the offloading of a ship of European refugees. (These actions were taken by FDR, whose portrait is the most prominent in the current White House. It hangs in the room where the President meets with current world leaders and US politicians.) 

 

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

Mike Lipper's Blog: Alternative Futures - Weekly Blog # 827

Mike Lipper's Blog: Bullish Chatter Leaves Out Useful Info - Weekly Blog # 826

Mike Lipper's Blog: Caution: This Time Is Different - Weekly Blog # 825

 

 

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 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

 

      

I Can Be Wrong - Weekly Blog # 749

 

 

 

Mike Lipper’s Monday Morning Musings

I Can Be Wrong

 

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

    

 

 

Property of the Territory

As an odds addict, I often make bets prematurely. I am used to being wrong on individual choices but feel comfortable with my weighted choices.

 

The advantage of being wrong is learning from it. As a market-oriented analyst and manager I equate a bear market with a recession.

 

Our clients and I feel more pain when surprised on the downside.

 

In November of ’21 stock price momentum started to slow. This was particularly noted in the growth-oriented NASDAQ market, which hit its historic high that month.

 

Also noted in carefully reading fourth quarter comments from insightful CEOs was a slower quarterly rate of gain vs the prior year. This caution was also noted in early 2022 statements.

 

Much was made of “supply-chain” problems, although it was focused almost exclusively on goods capacity limitations, not services.

 

To me they left out the growing realization that there would be a shortage of competent people to hire. What really caught my eye in the recovery from the pandemic cutbacks was first- and second-line supervisors not being replaced.

 

My conclusion was that leading growth-oriented companies were likely to produce sub-par results for ’22. I did not fully appreciate the goods slowdown impacting the much larger economic services sector.

 

My mistake was labeling the forthcoming environment an oncoming recession. It was clearly derived from stock market price probabilities.

 

A recession is a much broader national and increasingly international phenomena. The accepted definition of a recession results from top-down late-reporting data, with even later corrections.

 

Typically, by the time the academics identify a recession it has already changed, often improved.

 

Politicians choose to focus on the gross economic numbers impacting voters most. Not fully appreciating the indirect impact of market prices on the purchase patterns of almost all voters.

 

I was precisely wrong or premature in labeling the first half of ’22 a recession. Falling stock prices had a direct and indirect impact, probably hurting the average American by about 10%.

 

Current Data Bank of Concerns

• The yield on 2-year Treasuries is 3.398%, which is higher than both 10 and 30-year Treasuries. Historically this is an inflation predictor.
• Market analysts are concerned about reversal price patterns building in major indices, including the Dow Jones Transportation Index.
• Last week, 80.5% of prices fell on the NYSE, but only 71.4% on the NASDAQ. The latter has been a better predictor than the former, probably because the NASDAQ has more professional investors.
• The American Association of Individual Investors (AAII) survey has a somewhat extreme 50% bearish reading for the next six months, often a contrary indicator.

 

Longer-Term Concerns

• One forecaster believes unemployment will hit 6% and inflation will not decline to 4% by 2024.
• Niall Ferguson of the Hoover Institute believes the “World is sleep walking”, similar to the 1970s but worse. Suggesting that instead going into a recession we will experience a multi-year period of stagflation, with low growth, high inflation, and unemployment.
• My major concern is the lack of good leadership from our highest political and commercial elements throughout the world. Two examples are:
• Annual reports no longer stating employees are their most important asset. (When I sold our data business to Reuters, I told them our most important assets were our clients and our people, not our best available data.) This personality focused leadership is an important contributor to the growth of unions, which is not positive for customers and shareholders.
• The war in Ukraine has demonstrated what I learned in the US Marine Corps, that well led small units can effectively beat a larger force relying on massed manpower.

 

Question: How different do you think 2024 will be than today, and are you structuring for it?

 

 

 

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

https://mikelipper.blogspot.com/2022/08/4-5-changes-disruptions-faulty-weekly.html

https://mikelipper.blogspot.com/2022/08/mikelippers-monday-morning-musings.html

 

https://mikelipper.blogspot.com/2022/08/time-to-prune-weekly-blog-746.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 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

  

What Is The Problem? - Weekly Blog # 702

 

Mike Lipper’s Monday Morning Musings

What Is The Problem?

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

Where are we?

As we enter the third quarter, often a good performing quarter, US stock market volume is underwhelming. Apparently, declining confidence in global political leadership has led to a fall in investor confidence. In the latest week, each of the six best performing funds had a different investment objective. In fund performance order they are: Managed Futures, Flexible, Tech, Financial Services, Natural Resources, and Precious Metals. This suggests no common theme or the likelihood of similar stock positions. Thus, success is likely the result of critical skill in stock selection, not sector or market selection. A similar focus is seen in fixed income, where corporates are outperforming governments.

The American Association of Individual Investors (AAII) weekly sample survey of members is showing no enthusiasm for either a bullish or bearish future for markets. This survey is often a reliable contrary indicator for the next six month’s performance. Of all the indicators reviewed, the only one that’s relatively strong is the Barron’s Confidence Index, which favors stocks over bonds.

In general, I believe actions speak louder than words, particularly from members of the investment/financial community. This week I am seeing an increasing number of respected firms uprooting their employees and moving to Texas or Florida, not just for lower state taxes but for a better lifestyle. In addition, within the fixed income world there has been a considerable shift of investment people from one well known large employer to another. I am also noticing various product lines being transferred from one insurance company to another in the insurance sector. There are undoubtedly specific reasons for each of these shifts, but underlying each shift there appears to be a view that the future will be better for employees and their clients at their new firm. 

Should we be looking at longer periods and seeking different clues? There are brief lessons from Rome, Netherlands (vs Spain), England, and the USA. If we apply these and other lessons, we can handle our competition with China long-term.

Rome

For hundreds of years Rome was the dominant power in Europe, North Africa, and the Middle East. It was the technological leader of the world based on its mastery of building roads for military chariots and commerce. Rome was also the builder of aqueducts bringing water to Mediterranean cities. 

Rome was brought down by its own invention of “Bread and Circuses”. The political powers in Rome provided bread and free entertainment to its supporters in their arenas (circuses). In effect these were bribes. These “gifts” to the population of Rome, the tributes from conquered lands, allowed many Romans to not work. The history of great empires like Rome is that they fell due to internal pressures and the unwillingness to properly defend themselves. Thus, the great Roman Empire was defeated by bribes that weakened their will to survive.

Netherlands

The country fought a series of wars to free itself from the threat of occupation by the much larger and richer Spain. It was essentially a war between Spain, with its import of Latin American gold wealth, and the aggressive Dutch merchants who worked together. (One of the classic paintings of this era shows a group of merchants serving as night watchmen to alert their community to the danger of fire in their midst.) These merchants were inventive, creating the first stock exchange. They were also early in developing funding vehicles such as trading companies servicing their established colonies in South America, Asia, and Africa. Robeco also successfully built the first self-managed and owned mutual fund, way before the late Jack Bogle’s Vanguard. 

When I was a junior security analyst at Burnham, there was great respect paid to the firm’s Dutch clients who were believed to be very savvy judging risk. (I remember commenting on one occasion that the Dutch were selling shares in a Dutch international company to the Americans. It seemed to me that the locals were right, and they proved to be.) 

From a small geographic base and only a merchant fleet, they established a number of large international companies and colonies, without the benefit of a strong military. This proves that under the right circumstances merchant power and expertise is equal to or better than a strong military base. Even today, Dutch financial companies “punch” way above their geographic weight.

England

England, or more precisely the United Kingdom, is another former global empire from a small country with limited natural resources. Like the Dutch, they were early in building a savings industry, which is now a world financial power. The country has also produced more legal principles than any other in the world. While The Magna Carta was only between the King and Nobles, it proved to be the foundation of the concept of limited government. 

The English did something few countries have done, passing the crown three times to leaders born outside the country, and it worked well. The political establishment has also yielded to a popular view other than the sitting government. (While we celebrate the US victory at Yorktown as the end of the American Revolutionary War, a peace treaty was signed in London before the battle even began. Without electronic communication, America had to wait for a ship to arrive with the news.) The change in London was led by prime minister William Pitt, the Younger, who deemed the war too expensive relative to the value of US trade. The long war was difficult to win, so the finest military and navy conceded. Only great leadership of a country has the strength to recognize changes have taken place that require a change in policy.

USA and Prohibition

Almost as soon as elections were held in the cities of this country, it was common for some political groups to offer alcoholic drinks to would be voters. A small-scale throwback to the “bread and circuses” of Rome, but still a type of bribe. When the temperance movement gathered steam I suspect it received some support from those who felt gifted alcohol on election day may have changed some votes, particularly in big cities with lots of new voters. 

Much like with William Pitt, the Younger, popular opinion turned against prohibition when policies needed to be changed in the 1930s. It probably cemented the “wet” politician relationship with bootleggers, speakeasy proprietors, their suppliers and customers. Even after Prohibition, the only places in New York state to get a drink on election and primary days were locations independent of New York law, the Indian reservations and the dining room at the United Nations. This demonstrates the US can change policies when the perceived facts change.

China

I believe the current leadership in China is largely consistent with its history, demographics, and its financial structure. Approximately 90% of the people living in China today are descendants of the Han Chinese, the remaining 10% comprised of approximately 55 other national groups. While many of these groups have lived peacefully in China for hundreds if not thousands of years, they are viewed as potentially disruptive by the central government. Based on these concerns I believe the government does not want to add new nationalities into China. Because the Nationalist government fled China, they view Taiwan as largely Han Chinese. If I am close to correct, I do not believe Xi wants to occupy other countries. However, it is afraid of being trapped by unfriendly neighbors. That is why they want them to be friendly and not be controlled by other world powers.

Xi has other problems, including incipient competition funded by some successful businesspeople. He is very conscious he’s in a race against time, with the population aging and not replenishing itself.  The Chinese are prodigious savers who’ve had little to spend their money on and a heritage of living rurally with weather/crop cycles. Within family groups and some small communities there is a combination lottery lending mechanism, allowing the winners to jump to a higher economic level. In aggregate Chinese savings are enormous, funding both business and various levels of government.

The best way for the US to become more competitive with China is in some respects to copy them. Currently, our political leaders measure our success by the amount we are spending on goods and services. Although this provides current value, some consumption has no value long-term, causing this country to fall further behind as a saving society. The US government should switch its emphasis to saving for the future, where we are very much underfunding retirement. Additional savings would push up savings income and attract Chinese investors anxious to diversify their investments.  They are all conscious of the risks in their own over leveraged society. 

If we are able to do this, we would accomplish what my wife describes as a double win, benefiting both the Chinese and the Western investor. Such an occurrence would generate a lot of confidence.

Why Now?

While many people talk longer-term, most of their psychic and financial income is relatively short-term, impacted by their own expected tax rates. The future is almost never crystal clear and for many it has become either less clear, less attractive, or both.

Near-term elections over the next three years may provide some answers, or they may not. It will depend on leadership characteristics changing from the standard politician’s focus on the next election and those of statesmen or women focusing on future generations.  

   

What do you think?    

 

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

https://mikelipper.blogspot.com/2021/10/the-confidence-game-weekly-blog-701.html

https://mikelipper.blogspot.com/2021/09/two-confessions-weekly-blog-700.html

https://mikelipper.blogspot.com/2021/09/observations-prior-to-excitement-weekly.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.

The Markets Are Moving - Weekly Blog # 691

 

Mike Lipper’s Monday Morning Musings

“The Markets Are Moving”

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

Around the world and in many tongues we are told that prices and sentiment are changing in an unexpected way. Though we primarily focus on a single market we are conscious of many markets and issues, both domestic and international, in stocks, bonds, currencies, commodities, real estate, art, and politics. Each play a role in my mind as I attempt to assign a classification: fad, fashion, flows, and level of importance to various fluctuations. As with studies identifying the cause of wars, it is useful to identify the multiple minor elements and a final actionable cause.

Investors have identified the secret to being successful, as “winning by not losing”. Refining this slogan, I suggest both losing little and infrequently. With these objectives in mind, I’ll examine some of my underlying concerns about the US stock market. I am not alone, a large broker/bank’s market research team just headlined “Bearish divergences everywhere”. In scanning the present scene, I see lots of issues that should be reviewed. Below are the items listed in the order they appeared to me, without ranking or considerations toward linking them. In other words, be prepared for a water hose delivery.

Negative Numbers

• The Conference Board’s Leading Economic Indicators - Expected +0.9% vs +0.7% actual. 
• JOC-ECRI Industrial Price Index up +1.24% for week. 
• More down vs up volume 11/10, on the NYSE this volatile week. More declining than rising volume suggests sentiment is shifting toward the downside. 
• 1.5 year drop in life expectancy due to COVID and drug overdoses 
• American Association of Individual Investors (AAII) weekly survey of investor sentiment shows, bullish and bearish being exactly equal at 30.6%. This is normally a contrary indicator and an equally bullish/bearish reading suggest a lack of conviction in either direction and late reaching that conclusion.

Structural Concerns

• Average profit margins of the “FAANGM” ex Amazon is 25.3%, vs 12.9% for the S&P 500 ex leaders. High profit margins are clustered in a few technology stocks that did well during the restrictive COVID period. 
• Transportation supply chain disruption is structural due to lack of equipment and trained people. Will likely lead to higher prices and increased inflation until resolved.
• Global Test Score Rankings for the US: Math 37, Science 18, Reading 13. Lower rankings suggest the US will lose its leadership role in innovation, particularly if it cannot attract foreign talent with the necessary skills.
• Number of analysts at 12 investment banks: 4,400 in 2012 vs 3,100 in 2020. The growth in passive investing has led to a reduction in analyst coverage, perhaps creating increased opportunities for active investors in a less efficient market.
• 19% of the NASDAQ composite has no regular analyst coverage. This again is a potential opportunity for active investors.
• Too much money chasing private companies. Private Equity/Credit firms raising prices and lowering covenants. More capital chasing increasingly speculative companies in the illiquid private markets will likely increase risks.  

Working Investment Conclusion

Following the principle of winning by not losing, I suggest a review of intended long-term holdings. Identify those that you would buy more of at 25%-50% below today’s price. Treat those that don’t meet this hurdle as trading vehicles to be reduced in rising markets and expect significant price reductions in declining markets.

Please contact me if you would like to discuss any of the items mentioned.

Critical Question of the Week:

Have you developed your strategy for a market that is going to be driven increasingly by political trends through 2022? 

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

https://mikelipper.blogspot.com/2021/07/correcting-impression-and-gaining-some.html

https://mikelipper.blogspot.com/2021/07/sentiment-appears-to-be-changing-weekly.html

https://mikelipper.blogspot.com/2021/07/independence-day-3-investor-lenses.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.