A Different Year End Blog: Looking Forward - Weekly Blog # 869

 

 

 

Mike Lipper’s Monday Morning Musings

 

A Different Year End Blog: Looking Forward

 

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

 

 

 

Using Mutual Fund Data for Other Investors

Mutual Funds reveal their investment performance to the public every trading day and reveal their portfolios quarterly. In many cases the funds are managed by large investment managers responsible for other accounts. Their portfolios by implication reveal some of their philosophy of investing for other accounts.

 

Each week the London Stock Exchange Group publishes fund data that I used to produce. The report tracks 103 equity fund or equity related fund peer groups. Using the last five years of data, the shortest time period one should use in assessing investment performance, only 17 peer groups beat the +14.58% five-year return of the average S&P 500 index. (In selecting funds, I prefer to use 10 years.) There were three peer groups that did better than the S&P 500 Funds Index:

• Science & Technology +17.72 %
• Large-Cap Growth +16.62%
• Energy MLP +14.64%

Remember these are averages, so within the peer group some funds did better or worse than their group average. With only 16.5% of the groups beating the index, I question whether we are preparing a base for a meaningful general stock market advance.

 

Current Structure of the Market

The last four trading days of last week may not be significant but could be. The next two trading days will probably be dominated by last-minute tax-oriented transactions initiated by market makers or late players.

 

In the last four days 49.4% of the shares on the NYSE rose, while 55.8% rose on the NASDAQ. The more bullish NASDAQ players generated 205 new highs, compared to only 73 on the NYSE. Investors participating in the weekly AAII sample survey have been moving toward neutral in the last three weeks. Three weeks ago, the Bulls represented 43.9%, but they only represent 37.5% in the current week. The Bears only increased by 2.4% to 34.1%.

 

Possible Longer-Term Signals

Both political parties feel they should direct the private sector to a much greater degree than in the past. The latest example of this is the FDIC, which has wrung an agreement from the NASDAQ to limit the amount of ownership in small and regional banks. This a long echo of the “Money Panic of 1907” that Mr. Morgan solved in his locked library, which led to the creation of the Federal Reserve. A generation later the US government realized the Fed couldn’t help local farmers, their banks, and suppliers, so they passed the Smoot Hawley tariff bill, which was reluctantly signed by President Hoover.

 

Both the good and bad leaders of many countries recognize that the US has not won a war since WWII. Consequently, the growth of China in many fields is disturbing. Tariffs may protect some US businesses at a huge cost to lower income consumers and eventually isolate the US from growing markets, diminishing our military strength.

 

These issues and others are what we will be dealing with in the new cycle we have entered.

 

We wish you, your family, and friends a healthy, happy, and prosperous New Year.

 

 

 

 

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

Mike Lipper's Blog: Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

Mike Lipper's Blog: Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

Mike Lipper's Blog: It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

 

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Investing in Wishes or Thoughts, Fair or Full - Weekly Blog # 613

Mike Lipper’s Monday Morning Musings

Investing in Wishes or Thoughts, Fair or Full

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

Everything people do involves investing. Committing effort, emotions, or capital influences our immediate, short-term, or indefinite future. Thankfully, a relatively small portion of the world’s population invests in securities and funds, which is the focus of these blogs. I have been asked where I get the ideas for these weekly blogs and the simple answer is that they are derived from my thinking about the investment implications of much what I observe, through reading and other inputs. Today’s blog is drawn from my investment thoughts on what I observed this week.

Davos Implications from the Media
The global meeting of the “bright people” drew government leaders, politicians, business leaders, and experts (some self-appointed). We are all in sales and attempt to convince others and should recognize those who are similarly trying to convince others. My first impression was that almost all attending were selling their views rather than looking to buy the ideas of others. As someone who has attended many conferences that were turned out to be sales meetings, I have found them to be useful in making the initial sales effort and reinforcing my knowledge of previously sold items. Thus, my impression of Davos was that it was an expensive way to see old friends and make some new contacts who might possibly introduce the participant to an absent or eventual buyer.

In a few media interviews there was the expressed desire to moderate the boom and bust cycles, usually through some “top-down” strategy. This is a classic wish from those hurt by past recessions, who lust for the power to prevent future recessions. They want to live in a planned world, but they forget the old expression “man plans, and God laughs”.

There are two primary sources of economic/business cycles, fear and greed, and surprises. Today, practically every businessperson and politician are anxious to lengthen the present cycle through to their next critical report or election. The main way they attempt to do this is by weakening the safeguards put in place during the last cycle. They may be temporarily successful in keeping the game going through the next milestone, but increase the risk of failing to reach future milestones. Even if we are successful in moderating the greed in people, we will still be subject to periodic surprises like unexpected weather conditions, medical emergencies (coronavirus, etc.), and machine failures.

To me, the real message from meetings of “bright people” is that we live in an uncertain world. From an investment standpoint it means we need a series of human and financial capital reserves, recognizing that by definition we won’t be able to anticipate all surprises. The best we can hope for is to be a bit early in in recognizing changes. For example, politicians and other marketers are pitching for perfection, but are only going to get well thought out ideas delivered by imperfect humans.

This Week’s Divergent Views
Normally, followers of fund investments expect the average weekly performance to be less than half of 1%. This week through Thursday it was -0.37%, although there were nine mutual fund investment averages that lost over 1%. They were led by a drop of -3.94 % for the 130 Energy MLP funds and a -3.63% drop for the 98 China Region funds. Two investment objectives gained more than 1.0%, the 58 Utility funds gained +2.00% and the 267 Real Estate funds gained +1.06%.

The American Association of Individual Investors (AAII) sample survey showed that 45.6% were bullish compared with 33.1% three weeks ago. (Readings above 40% are abnormal.) In reviewing the weekly prices of stock indices, commodities, and currencies, 31% rose and 69% declined.

Quite possibly, the Dow Jones Industrial Average (DJIA) and the S&P 500 Index charts are signaling a rounding top. A rounding top for the NASDAQ Composite chart has not yet developed. This is significant because the NASDAQ has led the older indices higher. The question for long-term investors is whether current prices and valuations represent fair or fully priced merchandise. Fair prices suggest that buyers and sellers are evenly matched, with equilibrium prices having as much risk as reward for the period. Fully priced suggests that without any new positive information, there is more risk at current prices than there is upside. Relatively low volume and somewhat quiet derivative trading suggests that the direction in the near-term is not yet clear.

Attitudes are a Jobs Problem
In the US there are more job openings than people registered to work. When I question why employers can’t fill their vacancies, one of the constant replies is attitude, particularly the attitudes of young people who attended college. The employers are particularly concerned with  the attitudes of those who’s schooling was not centered on STEM. Those who are primarily schooled at liberal arts institutions (notice I did not say educated), believe that they do not have to provide a sufficient amount of work and cooperation with their bosses and fellow workers. They believe that they are entitled to jobs because of their time spent in school but are not committed to working hard and diligently. I suspect that in some cases the job seekers expect the need for more discipline than there was at school or home.

Saturday night, a thought occurred to me while listening to the New Jersey Symphony Orchestra’s Lunar New Year concert and celebration. At the end of the concert the stage was crammed with a large group of Chinese-American children between the ages of five and sixteen singing in Chinese, Italian, and English. They not only sounded good, but were an example of strict physical discipline. They reminded me of the precision drill teams I experienced in Military School and in the US Marine Corps. As a potential employer I would be very interested in discussing future employment with these choristers compared to some of the young people discussed above. A disciplined work force like those found in parts of Asia is another reason to continue to invest in Asia securities and funds.

Question of the week: Which of my ideas are helping you with your investments?



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2020/01/is-it-always-brains-over-flexible.html

https://mikelipper.blogspot.com/2020/01/architectural-sway-points-and-current.html

https://mikelipper.blogspot.com/2020/01/how-much-will-markets-decline-10-25-or.html



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Was the first week of October the Bull Market?

 Introduction

When everything was falling in price in August, I suggested that one should start to place orders to buy some of the "falling knives" which had the biggest declines, around -20%. These items included commodities and commodity related investments as well as TIPS. My view was that off a bottom there is often roughly a ten percent "relief rally" and this was the easiest money to earn in a new bull market.

In the period from October 1 - 8 , 2015, the following six out of 96 equity oriented mutual fund classifications' investment objectives produced double digit returns:

Natural Resource funds	+ 14.34%
Precious Metals funds	+  13.58
Global Natural Resources funds	+  13.32
Equity Leverage funds	+  12.04
Energy MLP funds	+  11.18
Basic Materials funds	+  10.76

As we know the price of crude oil rose 9% during the week, but there was more to these gains than the oil price pop. While there was undoubtedly a rush to cover various short positions, there were some participants that were sensing the potential for future inflation. More will be needed for the investors in these funds to break even for the year. Even after the double digit gains for the week, five out of the six groups shown above were still down double digits. (Equity Leverage funds were down -9.72% for the year to date.)

Smaller gains were made in the week by 93 out of 96 investment objectives tracked by my old firm now part of ThomsonReuters. Only few of these were able to show gains for the year. These tended to be large growth funds often with meaningful positions in the much politically derided Health/Biotech group. At least Moody's is concerned that we have not seen the bottom of oil prices, they have lowered the credit ratings on five US regional banks which have substantial energy loans outstanding. Being a contrarian I would watch these for an entry point, as I am convinced that in time the underlying collateral will be good on balance.

Even though we are not traders (as we invest for lengthy periods) we need to be aware of others in the marketplace. The risk for the trader is that the double digit that some funds enjoyed fulfilled "the easy 10%" pop expected after the sharpness of the summer declines. Now the trading question becomes whether the August lows will need to be tested in order to put in the low for the year, if we are going to have a meaningful recovery before the US presidential election year.

We Don't Care

As long-term investors we are not very excited by this year's performance unless it has significance in terms of the implications of meeting our clients’ longer term payments needs of their distant beneficiaries. Why am I so relaxed at the moment? First, I believe last week's move was in recognition of some changing attitudes beyond the "oil patch." As is often is the case, I look to the fixed income world for guidance. Domestically, taxable bond fund classifications showed gains, albeit small. These for the most part were funds that trafficked in lower credit rated paper. For people to bid these up they could not be very concerned about a meaningful recession. The other message that I perceived was that the poorly performing TIPS funds gained while other US Government Bond funds showed minor losses.

Foreign Signals

Emerging Market Bond funds, in local currencies, produced the best returns among fixed income types by a wide margin last week, +4.44%; in contrast with Emerging Markets Debt hard currency issues +1.84%. Bond funds which invested in more developed countries gained +1.3%.  My interpretation of these results is, at least for the week, that market participants were suggesting the meteoritic rise in the dollar was at least peaking.

Volatility

The investing public that is glued to the media is fearful of triple digit price changes in the Dow Jones Industrial Average. Using the somewhat less volatile S&P 500 since 1928 according to Factset/StockCharts, the days with a 1% (Up or Down) occurs every four or five days. As a matter of fact I set my computer alerts to only inform me when prices move at least 2% and don't consider action below 3-5%. The New York  Federal Reserve Bank is somewhat addressing these concerns in the corporate bond market that has had bank trading capital reduced by 75%. They maintain that there is ample liquidity to absorb sudden shifts in prices. (Interestingly enough, they did not address what in theory is the deepest fixed income market in the world, the market for US Treasuries. Because of rapid global trading of these instruments through computer interfaces by non-bank dealers and investors, I am worried. During hectic periods of unwinding "carry trades" when treasuries are collateral for borrowings in more exotic paper, I am concerned by the chance for some indigestion.) 

Question of the Week: How are you addressing this market, did this week mean anything?

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