Slow Moving in a Fog - Weekly Blog # 888

 

Mike Lipper’s Monday Morning Musings

 

Slow Moving in a Fog

 

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

 

                             

 

Weather Predictor’s Real Function

One should pity the role of weather predictors who must often predict changes in the weather, either by hour, day, week, month, or year. One or more of their outputs are frequently wrong because something changes. As a professional chartered financial analyst (CFA) I am both grateful and sympathetic to their plight.

 

The only thing they can be confident of is making securities analysts look good, having a somewhat worse prediction record than the analysts. The primary reason they are wrong is that something changes. As both surviving analysts and politicians are prone to say, when the facts change, my views change.

 

To safeguard my self-confidence, I rely on a weather condition. A fog has descended on the economic and securities playing fields. We will be in such a situation this week and looking forward to the future. Since managing and owning a portfolio, “facts/sentiments” change every minute, hour, day, week, month, or year. It is more like navigating a vessel than a piece of statutory. Dangerous risks in a fog are unidentified shoals or obstacles, as well as warning elements which occur randomly.

 

Friendly Signals

• Many Chinese believe that 888 is a lucky sign of the future.
• The American Association of Individual Investors (AAII) latest weekly sample survey showed a decline in bearish readings and an increase in bullish readings.
• 54% of the weekly readings of the prices of indices, currencies, commodities, and ETFs in the WSJ were higher.
• Unusual trading volume on Friday was the highest of the week.

Warning Signals

• The Financial Times noted that “Institutional Money Managers are trimming US exposure...”
• The US Federal Government is expected to cut-back “Watchdogs at the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency and the Securities and Exchange Commission.” (Beneath the surface, there appears to be concerns about the soundness of small banks and private debt instruments.)

 

Mixed Messages

When a stock price drops about 1% following a corporate announcement after it was expected to rise, either the expectation was wrong, or some didn’t understand the message. This is particularly true when the stock and announcer are both among the best practical educators in the investment world. I am referring to the drop in the price of Berkshire Hathaway* after Warren Buffett announced his intention to ask the Board to approve his resignation as CEO, effective year-end.

*Berkshire Hathaway is held in both client and personal accounts and is the largest holding in some of the later accounts.

 

Warren Buffett has said for years that the stock price would likely rise after he retired, and I shared his views for a couple of reasons. First, his retirement would eventually happen and second that he was running the company for the heirs of the shareholders. With that in mind, he ran the company in a low-risk fashion. In many, but not all ways, Berkshire was a trust account for the shareholders’ heirs.

 

His long-term friend and vice-chair, the late Charlie Munger, taught him not to buy cheap stocks on a price basis, but good companies at fair prices. Charlie called Warren a learning machine because he learned every day, particularly from losses. This reinforced the teaching of Professor David Dodd at Columbia, who taught the Securities Analysis course based on his experience in the Depression. This was perfectly appropriate for the times, and he was still focused that way in the mid-1950s when I took his course.

 

The course was essentially an accounting course using financial statements. It took me a number of years to learn the other key lesson, the business analysis of the issuer. This knowledge was one of Charlie Munger’s contributions to Warren. After Charlie passed a few days before his hundredth birthday, the likelihood of Warren’s own retirement became more likely.

 

His retirement became possible with the appointment of Greg Able, who is much more of an operating manager than a securities manager, which Berkshire neglected in my opinion. Recent sellers of the stock were likely worshipers of “Mr. Buffett” or possibly the heirs of long-term holders who now felt free to capture the assets for their own needs rather than wait for the passing of their relatives. They have probably never read anything about Berkshire’s investment thinking. Thus, I do not believe they are informed sellers.

 

How do you see things?

 

 

 

 

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“Hide & Seek” - Weekly Blog # 880

 

 

Mike Lipper’s Monday Morning Musings

 

“Hide & Seek”

 

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

 

                             

 

Friday’s Victory Signal?

After an extended period of stock price declines, prices shot up on Friday. The “Bulls” hoped it was the beginnings of a “V” shaped recovery, but some market analysts were skeptical. A strong move often ends when there is a 10 to 1 ratio between buyers and sellers, which was the case with Friday’s 10 to 1 ratio.

 

The Wall Street Journal publishes “Track the Markets: Winners and Losers” in their weekend edition. It tracks the moves of 72 index, currency, commodities, and ETFs weekly. It may be worth noting that only 35% rose for the week.

 

The Second Focus

The media, and therefore most of the public focus on daily price changes. Even with the growth of trading-oriented hedge funds and the conversion of former securities salespeople into fee-paid wealth managers, the portion of the assets invested in trading is less than the more sedate investment accounts invested long-term for retirement and similar institutional accounts. My focus is on the second type, which includes wealthy individuals.

 

The Current Administration is Ignoring Us

The first step in security analysis courses often starts with reading what the government puts out in order to develop a foundation for an investment policy. The current administration is the most transactional in memory. The President, Vice President, and Sectaries of Treasury and Commerce made and lost money on market price changes. This has forced me to find other sources to build our long-term investment philosophy.

 

Inevitable Recessions

Studying both recorded history and our own lives, it tells us that life does not move in straight lines, but in cycles of irregular frequencies and amplitudes. Simplistically, we can divide these movements into good and bad periods. However, an examination of the periods reveals differences in how each period affects us. The differences and how they affect us depends on where we begin each cycle, the magnitude and shape of the cycle, and any surprises along the way.

 

Both up and down cycles are caused by imbalances within their structures, which often occur due to other imbalances known or unknown. Most importantly, any study of cycles indicates they happen periodically and surprise most participants. Even with detailed histories of cycles they can be difficult to predict, although the root cause of most cycles is extreme human behavior.

 

While some cycles are caused by natural weather-related events, most economic cycles are caused by envy and/or too much debt. I am perfectly comfortable predicting a recession will hit us, but don’t know for sure when it will occur. (In a recent discussion with a small group of senior and/or semi-retired analysts, they felt there was a 65% chance of a recession within 12 months.)

 

The fundamental cause of cycles is often the result of people reaching for a better standard of living through excessive use of debt, which often results in a struggle to repay debt and interest. At some point the growing federal deficit, combined with growing consumer debt, as evidenced by credit card delinquencies, will force a decline in spending. Reduced spending will lower GDP and production. The fact or rumor of this happening is enough to bring securities prices down.

 

Confusing Hide and Seek

Hiding is not the solution to avoiding a loss of purchasing power, both actual and supposed. Cash is the only true defense, although it is not a defense against inflation which reduces the purchasing power of most assets. However, the biggest long-term loss from hiding is foregoing future potential high returns.

 

Our Approach

I believe a cash level no larger than one year’s essential spending should cover the crisis bottom. Most of the remaining capital should be devoted to seeking out substantial total returns that can produce multi-year gains.

 

Where are these Gems?

Bargains are usually hidden in plain sight. One example might have been the fourth quarter 2024 purchase of European equities, which were priced for a European recession. However, European equities actually generated expanded earnings from Southeast Asia, Latin America, and Africa. (In a recent discussion with one of the largest investment advisers negative on investing in Europe. Their views were based on their continent’s own economics, while paying insufficient attention to companies growing profitably in the aforementioned regions)

 

Thus far in the first quarter I have been lucky enough to own both SEC registered mutual funds and European-based global issuers. (It took patience because earlier performance periods were not good.) This shows the need to be courageous when seeking future bargains. 

 

We would appreciate learning your views.

 

 

 

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Reading the Future from History - Weekly Blog # 863

 

 

 

Mike Lipper’s Monday Morning Musings

 

Reading the Future from History

 

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

 

 

 

History May Suggest:

1. The American People Won the Election
2. The Recession has started

 

The Declaration of Independence was signed on August 2nd, 1776, the US Constitution was passed in 1787, and the last state (Rhode Island) ratified it in 1790. Today, Rhode Island still remains the smallest state in the Union. Thus, since the beginning of our nation the rights of our smallest state have been critical to our progress. One of the many things making the US different than other republics is The Founding Fathers fear of the tyranny of the larger states on the smaller states. Consequently, our Electoral College favors state representation over population. In the 2024 election, even though President Trump polled more votes than Vice President Harris, the House is almost evenly split, but he won 36 states and lost only 14, mostly on the coasts or major rivers.

 

This split is one reason I suggested President Trump will likely have difficulty getting much legislation easily passed through both houses, where he only has a majority of about five votes. Of the 14 major issues, only two can be accomplished through just executive orders.

 

Actually, many if not most Americans are pleased with the results of the election. An incompetent government was dismissed before it became even more intrusive and has been replaced by a new administration with untried ideas. New legislation will be delayed by a disruptive Congress and a slow-walking Deep State. Many Americans would like it if the air conditioners in D.C. did not work, fulfilling Hamilton and Madison desire that government work be part-time.

 

Recession Coming?

As someone rowing in a boat with the wind picking up and clouds darkening, you become relatively certain it will soon rain. The question is, will you get to dry land before getting really wet?

 

Evidence of an economic storm on the horizon can be summed up as follows:

1. Stock analysts have been instructed for generations that high quality bonds are more sensitive to economic changes than stocks, at least initially. Currently, yields have been going up (prices down). However, mid-quality bond prices have barely moved at all, something overseas fixed income investors are very sensitive to.
2. Most US stock prices declined this week, with just 37.7% of the stocks on the NYSE rising and only 27.6% rising on the NASDAQ. NASDAQ stocks have performed better than those on the “Big Board” for some time and are cheaper on a market to book value basis. This suggests the NASDAQ investor is a more professional investor.
3. The American Association of Individual Investors (AAII) weekly sample survey of investors indicates the bullish or bearishness sentiment of their investors for the next six months. In the last three weeks, the bullish reading has risen to 49.8% from 39.5%, while the bearish reading only went down to 28.3% from 30.9%. Market analysts believe the “public” is often wrong at turning points. With that in mind, it is interesting that the bulls gained 10.3% while the bears dropped only 2.2%.
4. The weekend WSJ tracks some 72 prices of stock indices, commodities, ETFs, and currencies. This week only 12.5% were up, with Natural Gas up a leading 5.77%. The remaining gainers all rose by less than 2%. This likely indicates sophisticated investors are nervous about what lies ahead.

 

 

Thoughts?

 

 

 

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Understand Numbers Before Using - Weekly Blog # 851

 

Mike Lipper’s Monday Morning Musings

 

Understand Numbers Before Using

 

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

 

The most common mistake made by investors is too brief an introduction to the investment and economic numbers used by most who chatter about “the Market” or the “Economy”. For example, the three most quoted US stock market indices are the Dow Jones Industrial Average, the Standard & Poor’s 500, and the NASDAQ Composite. Each of these unique indices was created for a specific purpose and was designed for a specific audience. However, they are now used for numerous purposes worldwide, including New York, Chicago, Washington, London, Tokyo, and Shanghai. The biggest mistake is assuming the indices are identical. Although the indices all have short comings, proper use of the numbers can lead to useful insights in making decisions.

“The Dow”
The most well-known of all market indices is the “Dow” (DJIA), although it was not the first indicator from the Dow Jones newsletter writers. They originally tracked the performance of trunk line railroads as the most important stocks in the 18th Century. Later, due to the industrialization of America, they created an index of a small number of large industrial company stocks. The main readers of their newsletter were retail brokers. At that time, it was believed that the higher the price of shares the higher the quality, making them more valuable. This led the DJIA to be weighted by the prices of the shares. As is often the case, there was unanticipated demand for the results achieved by the index. Consequently, they took advantage of the wire systems of both the large “wire houses” and the press in developing a national and international market for the index. (The equivalent of the Rothschild’s carry pigeons.) Most local papers, and later radio/television, quoted the close of the NYSE market by using the “Dow”.  Thus, across the US many more people than owned shares were exposed to the index.

The Washington Applications
Political people in Washington started following the index as a measure of the economy. They used it as a gauge of what local voters thought about the economy. The Fed’s Open Market Committee consisted of a rotation of the presidents of the local Federal Reserve Banks, whose districts were roughly tied to the size of the financial assets the local reserve banks supervised. The boards of directors of these local reserve banks all have financial leaders familiar with the DJIA. Thus, the index became an unofficial factor in bank regulation.  Fed PhDs, recognizing the limits of a 30-stock index in producing many economic studies, used NYSE data to supplement the DJIA. (This thinking led to the recognition that other indices would be needed.)

Standard & Poor’s 500
Historically, the index that next came into use was the S&P 500, which was primarily used by institutional investors. This index was designed to correct the acknowledged problems of the DJIA. First, it had roughly 500 stocks. Second, it used the market capitalization of the issuer’s common stock for weighting purposes. Standard & Poor’s is a premier bond rating organization which also covers equities. The company had an extensive menu of data points that it used to assign credit ratings on stocks, which it also applied to the S&P 500 Index. Thus, we can now compare the price of various indices relative to their book values. The S&P 500 Index trades at 5.09 times book value vs 4.08 times for the DJIA. This comparison highlights the S&P 500 index’s investment in companies perceived to possess more growth than those in the DJIA.

In my work in analyzing large-cap mutual funds, which have many more assets than other slices of the mutual fund pie, I use the SPX as the first comparator before more narrowly using growth, value, and core breakouts. I similarly do the same for most global funds. Unfortunately, I can’t find enough data rich breakouts in many local markets, indicating these funds are primarily looking for local shareholders.

NASDAQ Composite
This 3rd index does not have a size bias. The index is comprised of bank stocks, local companies, and companies located in various geographic locations, including Canada, Israel, China, and numerous other countries. Additionally, it is the initial home for companies recently gone public. Consequently, many of the stocks on the NASDAQ have limited liquidity due to the low number of shares offered and/or the founders retaining a significant portion of the stock. It is not unusual to see 4 or 5 times the number of shares traded on the NASDAQ compared to the “Big Board”.  

The “Market” is Changing
Volume is more sensitive to speculative opportunities than highly rated investments and it is amplified by the use of derivatives, ETFs, off-market transactions, and less capital present on the floor. Dow Jones S&P Global is now the owner and provider of both the DJIA and the S&P 500. Even though there have been changes, there are still missing elements in market tools.

The separation between stock and commodity markets does not make it easy to provide a fuller solution to evaluate a uniform portfolio of assets and their risk modifications in a 24-hour, seven-day world. Agricultural products, impacted by weather, are important to food manufacturing and distribution industries. Many, if not most business cycles, are impacted by agricultural disruptions, real or feared. One of the causes of the great Depression was farm belt problems caused by excessive debt creation and poor climate conditions. These led to the passage of the Smoot-Hawley tariff and its global ramifications.

(While agricultural products as a percent of population is much smaller today than in the 1920s, the global impact may be the same order of magnitude.)

Moving on to the hard commodities, the timely completion of new mines and transportation systems can be disruptive to many areas, including stock markets.

For every global consumer, global producer, shareholder, and military person, the fluctuating value of major currencies is a cause of concern. This summer the US dollar dropped from $106.4 to $100.7. (This is likely to have an impact on inflation)

A Working Conclusion
Indices are a useful snapshot, but what is needed is a continuous motion picture and an understanding of what is causing the change, including built in construction biases and an identification of what is missing. If you have any thoughts, please share them.

 

 

 

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What Moves the Stock Market? - Weekly Blog # 824

 

Mike Lipper’s Monday Morning Musings

 

What Moves the Stock Market?

 

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

   

 

         

Fearful Challenge

A common mistake many people make is confusing the credibility of spiritual leaders and markets pundits. Professional preachers proclaim their belief in what will happen in the fullness of time. Stock market pundits, who are not as bright or skilled as many religious speakers, make the mistake of being more specific about dates and price levels. At best, market prognosticators can occasionally be right about dates and/or prices, but rarely both at the same time.

 

With all their mathematics and computer skills, recorded history suggests the future should be knowable in every instance. While we have great precision as to what happened, we don’t know what caused people to do what they do. Since we don’t rigorously examine our deep emotions for each action, we may not know exactly why we bought or sold something at a particular point in time.

 

Best We Can Do

The best we can do is identify what we think we knew at a particular point in time. Investors currently have a plethora of prices and other indices available to them, but rarely a record of emotions. Furthermore, our decision-making process evolves over time, influenced by current leadership and the ideas of other people.

 

Because we only know or remember the numerical data surrounding our decisions, we attribute our decisions exclusively to numbers. I believe this is why in looking at financial history we tie our decisions exclusively to the known numbers. It is the main reason many of the numbers do not generate good predictions. I would not be surprised that the track record is only 60%-75% accurate. (This falls under the old label of “good enough for government work”.) 

 

Thoughts on the Day of the Decision

There are only about 240 days a year when most investors can execute an order. Most investors probably trade less than once per month, with institutional investors trading less than 8 days per month in their long maturity portfolios. Consequently, most investors are not active most days, with nothing spurring them to action in each portfolio. Additionally, the spur to act may occur on quite a different day than the trade, unless price is the cause. Thus, it is difficult for an outsider to identify the ultimate cause of the action.

 

What Could Have Been the Critical Fact Last Week?

1. The DJ Transportation Index chart looks toppy.
2. FT headline “Hedge funds stampede into cocoa futures”. (Hedge funds are trend followers and there is a history of cocoa crashes sending players into highly leveraged coffee plays.)
3. Morgan Stanley is laying off several hundred from their wealth management division. (This division is the central reason Morgan Stanley is viewed more highly than investment banking and trading driven Goldman Sachs.)
4. In the chart in the weekend Wall Street Journal of stock indices, commodities, currencies, and ETFs, 65% are declining.

 

Too Narrow a Focus on Inflation

Inflation is caused by an imbalance between supply and demand for an undetermined period of time. It includes the follow elements: supply or demand shocks caused by weather, accidents, government actions like tariffs and other impediments to free and/or easy trade, and partial or complete military mobilizations. (In terms of the current US situation, the federal government is the single largest contributor to inflation, followed by union management pay demands.

 

Calendar Guide

While the calendar year is already more than 10% complete, we probably have not seen the most critical announcements of the year. Considering we have a probable lame duck president, divided political parties and a split Congress, this may be the time to build a higher-than-normal cash reserve to be used to buy some sound investments for the remainder of the decade.

 

What Do You Think?

 

 

 

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Solo Messaging is Meaningless - Weekly Blog # 818

 

Mike Lipper’s Monday Morning Musings

 

Solo Messaging is Meaningless

 

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

  

 

 

“The Floor” No Longer Helps

Years ago, on both the New York and London stock exchanges, it was normal for members to query the assigned market-makers for a supply/demand picture on a stock they were trading. When the system worked, specialists supplied the size of supply/demand and their opinion on the next expected price needed to clear trading levels. This system worked reasonably well until the “upstairs” trading desks of some member firms began competing for institutional size orders.

 

At that point floor specialists believed they no longer had an exclusive information advantage. Consequently, when approached for a “picture” on a stock, they were reluctant to reveal any orders left with them. It quickly became clear from their responses that they were describing their own positions, or “talking their own book”. This was far less helpful in understanding where the real market was and the prices necessary to clear nearby trading levels. Over time, this left the floor to the upstairs trading desks for stocks with institutional size interests. This led to a situation where those without good relations with the institutional trading desks were at a disadvantage. Increasingly they were isolated from the flow of business.

 

The same thing happened to the distribution of news on the economy, where the distribution of economic news became increasingly biased. Today’s biases are so strong that a substantial amount of the current “news” has lost its usefulness for investment decision making, or should have.

 

A Small Example with Larger Implications

Friday’s trading was lack-luster. The three most popular stock indices, the Dow Jones Industrial Average, the Standard &Poor’s 500 Index, and the NASDAQ Composite, all moved fractionally. The movement was so small that the combined three movements only totaled 0.34%. The Wall Street Journal ran the headline “Major Indexes Eked Out a Gain…” (The WSJ is better than its competitors.)

 

My problem with this is that the Russell 3000 gained the very same 0.34%. (The Russell 3000 tracks the performance of the 3000 largest stocks, including those in the DJIA, the S&P 500, and most of the NASDAQ.) The person writing the headline at the WSJ was giving some comfort to bullish investors and those on the political left.

 

The Missed Opportunity: The Dichotomy

The WSJ also published articles on three other factoids:

1. “Supermarket giant drops Pepsi and Lays over price increases”
2. Xerox cuts workforce by 15%.
3. WSJ weekly prices of commodities, stock indices, ETFs, and currencies had only 16% of them rising.

 

The dichotomy is that while most of the left-leaning media is full of happy talk about expanding the economy, businesses are cutting back on people, locations, inventories, and some prices. One might say they are preparing for a recession, or stagflation. The bulls and bears not talking to each other, which is not a sound position for making investment decisions.

 

Stocks to Buy for Different Times

 In the WSJ weekly price chart, the fifth largest gainer was Healthcare. This is a sector heavily owned by institutions which has not seen many gains. Money-making opportunities look good considering the increasing amount of healthcare needed to be funded, independent of the cyclical economy for pharmaceuticals and health related services.

 

Once the economy bottoms Energy producing corporations will see demand rise, which should last for several years. One way to play this is through accounts + personal holdings in Berkshire Hathaway. (BRKA & BRKB will benefit from a large portfolio of petroleum stocks and ownership of operating utilities.)

 

We also serve investors who have multi-generational payments ahead of them. One of the few ways to play this is through stocks and funds invested in Africa and the Middle East. One of the classical ways to invest is to buy sectors under current price pressure. We think the Chinese region is well worth developing a long-term investment view.

 

Let’s Learn of Your Views.

 

 

 

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Indicators as Future Guides - Weekly Blog # 808

 

Mike Lipper’s Monday Morning Musings

 

Indicators as Future Guides

 

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

 

 

Since before humans began recording history, they looked to the past to predict the future, believing the Powers (God or Gods) would repeat.  This belief was fortified by the introduction of numbers which repeated. Thus, as numbers were collected to create past performance records, humans arranged them into groups of indicators to predict the future.

The problem with this approach is that we treated the collected numbers as indictive of the future. Numbers that are an incomplete historic record are an abstraction of the events. Missing from the scores are two critical elements.

1. What else was simultaneously happening was rarely recorded within the same or relevant time period.
2. There was little if any documented notation regarding motivations. So, we do not know why certain things were done.

 

Despite these drawbacks we enshrine indicators as the proximate causes of people’s actions. This is particularly true in using historical actions to settle contemporaneous actions in legal disputes, e.g. The Prudent Person rule.

 

(Commercially, I am happy with the reliance on past data, for it encouraged the desirability of past mutual fund performance, fee, and expense data. However, my stack of losing racetrack tickets demonstrates that the past is not the absolute prolog for the future.)

 

Nevertheless, in the absence of “divining rods” indicators are useful devices in looking for future guidance, or for a good crutch.  To reduce my reliance on placing too much importance on my investment thinking, I examen numerous indicators, and where possible what else was happening at the time, trying to ascertain motivation. From my handicapping experience, I am aware that popular choices pay off less than choices that are less popular.

 

The following, in no specific order, are some indicators I look at each week and my reactions to them.

 

Transaction Volume Location

This week on the NYSE, 77% of traded shares declined, with only 59% declining on the NASDAQ. (I believe there is currently more transaction volume by both the public and less experienced managers on the NYSE. Note, NASDAQ prices gained more this year and thus have more to give back if we are in a general decline.)

 

Corporate Announcements

Korn Ferry*, a major employee sourcing firm announced that it was dismissing 8% of its work force. (If their corporate clients were planning to hire soon, they wouldn’t be letting people go. ADP* also forecast a      decline in customer’s payrolls, which hurt their stock. Additionally, UPS predicted lower shipment volume coming from China, suggesting retail merchants are cutting back.

(* Owned in personal or managed accounts, not recommended.)

 

Congressional Indicators

A split Congress is expected to last at least through the next election. With very little legislation enacted, Democrat inflationary actions and Republican deficit cuts are unlikely to materialize.

 

Future Investment Performance

Double digit equity performance is not normal, and triple digit performance is even less so. The better performing ten-year university records are in the high single digits. 12% of American taxpayers had a net worth of over $1 million net, with the bulk of their assets in securities and their homes. Current private equity and debt investing is on average producing low single digit returns. Private investments are showing signs of aging, relying on raising new money from the public and newly managed accounts that were formally paid commissions. New and less experienced managers are entering the business.

 

Current Prices

The weekend WSJ publishes the price moves of securities indices, currencies, commodities, and ETFs. I track the % up vs. down to get an overall feel for the 72 investments. This past week only a 1/3^rd were up. Of interest were the top/bottom two, Nymex Natural Gas +9.14% and Lean Hogs +6.75% vs. -6.29% for the S&P 500 Communications and -6.19% for the Dow Jones Transportation. (This suggests to me that these extreme prices are the result of sudden news items. With 3 of the 4 extremes in the +/- 6% range, it suggests this is a normal move for surprises.

 

Working Conclusions

1. The general primary trend is moving down.
2. In a bear market there are sudden rallies.
3. Long-term investors should look to buy opportunities that will be different than past winners over the next ten years, or possibly five. There will be material restructuring of society, the economy, and the leadership of many political, corporate, education, and non-profit groups.

 

Share your thinking with us.

 

 

 

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Mike Lipper's Blog: Changing Steps - Weekly Blog # 807

Mike Lipper's Blog: Change Expected - Weekly Blog # 806

Mike Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805

 

 

 

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Primer on Starts of Cyclical & Stagflation - Weekly Blog # 771

Mike Lipper’s Monday Morning Musings

Primer on Starts of Cyclical & Stagflation

 

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

 

 

 

Looking at the current US stock market, the determination of the next important market call is not known, at least not by me. On one side the believers think the Fed can change inflation by controlling the interest rates. On the other side there are pragmatists who see a much more complex world where stock and other prices can fall meaningfully for an indefinite period.

 

Recognizing that I like everyone else am a gambler, I look at how to prepare investors for either extreme. As usual, I find an imbalance born from a “liberal arts” education and the short form media. We have been conditioned to find an easily understood important trend demonstrating future growth. Because of its relative rarity, there is little knowledge concerning the downside of recessions/depressions and stagnation. Unlike the happy talk of growth, most people don’t want to focus on periods where people get hurt financially and emotionally.

 

Without predicting a significant move to the downside, I am gambling our time by examining the nature of possible material downsides. There is significant but not conclusive evidence that such a period is coming. If such a period does not come soon, at least you will have learned what to watch for in the future.

 

Troubling Signals

As with many laundry-lists, the order of observation is accidental and not meant to signify rank of importance or order of future troubles.

•  Continued short-term US Treasury rate inversion.

The 2-year rate is 4.51% which for many is attractive. This is quite competitive with stocks yielding less with uncertain futures.

 

•  Stock prices fell for 4 days last week.

• Excluding energy earnings, other companies lost -7.1% in ’22.

Are we beginning stagflation starting with 2016?

 

• $2.2 billion going into international equity ETFs vs. $1.7 billion going into domestic ETFs.

 

• Reasons for poor earnings from a successful importer: 

High and expensive customer inventory leading to low replacement sales and dollar weakness. There appears to be a switch in strategy from profit focus to cash management.

 

• OPEC+ did not raise prices when Russia cut production.

Quite possibly they felt that Biden was inflationary, which could reduce demand.

 

• China’s Belt and Road Initiative is slowing and shifting.

Need more US imports to pay for China’s exports.

 

• S&P Global is not issuing guidance, as the future is uncertain.

 

• A number of financial services companies are changing CEOs or making material changes, like Goldman Sachs.

One of our concerns is that most organizations are currently led by people with political skills, not operating skills.

 

• 31.6% of net ETF equity flows are in Chinese investments.

 

• Liquidity is declining again.

 

• WSJ article headline “Retailers Hesitate to Accept More Inventory” from apparel makers.

 

• Global Minimum taxes are inflationary.

 

• Wonder if the 60/40 ratio of stocks to bonds is misapplied.

Should it instead be applied to risk and less risk, with less risk defined in terms of income?

 

What is the Future?

While the gambler is forced to deal with possible changes to the present, the speculator accepts the present as the base case to build her/his model of preferred change. I am a combination of both, and don’t like the present or its logical path. With that in mind I suggest the following radical changes, any of which might change our current trajectory to a better future.

 

Possible, but Unlikely Changes

Recognize current economic problems are not a function of too little demand, but of too little supply. Demand in the commercial world for the most part is a function of competition and customer desires. However, in far too many transactions the heavy hand of government dictates what the customer will buy and at what price. It would be an interesting exercise to calculate how much government interference costs the economy!! My guess, it’s of the same order of magnitude as the cost to consumers of raising interest rates to somewhat ineffectively bring down inflation. (Inflation is caused by demand exceeding supply and excessive government grants.)

 

There are two other ways the government can reduce its costs and improve its services:

1. In an electronic age there is precious little advantage in having major government departments and agencies located in D.C. for the ease of lobbyists and the enshrinement of the government working class.
2. Government at the Federal and State/local levels are monopolists. The existence of Chartered Schools largely demonstrates that the school system can benefit from competition. I wonder whether the same could be said for hospitals and other medical institutions.

 

All organized spending groups, whether for profit, non-profit, or government agencies, could benefit from post spending analysis. We would then be able to see what was accomplished from the spending and what lessons could be learned. The more efficient companies, particularly serial acquirers, do this.

 

A similar approach would make sense in terms of aids and grants. This should be a requirement in regular reports to donors and citizens. I suspect the delivery costs are greater than the benefits.

 

Productivity measures have been in secular decline for many years. This is probably caused by inefficiencies in our society rather than labor’s bargaining power.

 

What are the inefficiencies you see?

 

 

 

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Mike Lipper's Blog: Words that Trap: Growth, Value, Recession - Weekly Blog # 770

Mike Lipper's Blog: What will the Future Bring? - Weekly Blog # 769

Mike Lipper's Blog: Confession: Numbers Don’t Tell All - Weekly Blog # 768

 

 

 

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Copyright © 2008 – 2023

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Contact author for limited redistribution permission.