Failed Expectations: Do Details Count? Zig-Zag Flips - Weekly Blog # 925

 

 

Mike Lipper’s Monday Morning Musings

 

Failed Expectations

Do Details Count? Zig-Zag Flips

 

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

 

 

 

Was this the week that was?

Last week’s blog anticipated a ruling by the US Supreme Court on the Presidential use of Executive Orders to impose tariffs on countries and products. It was further expected that the President would use substitute measures to accomplish similar goals if he loses the Supreme Court case. Additionally, there was a belief that the government would be forced to repay the existing tariffs to the American people (voters). The new tariffs would probably cause some changes by foreign nations. None of this happened.

 

Instead, the major topic of conversation at the World Economic Forum at Davos was Greenland. Discussions moved at lightening or Trump speed from a military occupation to a not fully disclosed peaceful agreement with NATO forces by the end of the week. The importance of these dramatic changes reminds us of what may be topic one in developing future investment strategies. All of this brief history shows how wrong we can be. What we missed was the significant price level change that occurred this week.

 

Critical Price Changes

Starting with the least followed ECRI industrial price index, which normally moves ploddingly. The index rose to 126.28 from the prior week’s 120.49. The jump raised the year-over-year gain to 6.58%, which is greater than the various inflation measures the Fed and many others use. I would not be surprised to see industrial buyers of products add this amount to their resale prices, after adding an insurance amount to protect their profits against further prices increases.

 

One explanation of ECRI prices can be found in the weekly price chart in the weekend Wall Street Journal, which showed Natural Gas rising +70.0% and Silver +14.57% for the week. Part of these increases could be for increased use of these items in the normal course of business. However, I suspect some of the increased demand comes from trading and/or gambling interests, either on the long side or from covering short positions. The importance of the last sentence is that the size of the trading and gambling sectors is growing, and I believe it’s already quite large.

 

The third price increase impacts all of us in our daily purchase of goods and services. It is the value of the dollar. On Friday the 16th of January the US dollar index was 99.395, one week later it was 97.599. The President has threatened foreign countries if they sell US assets!! (I personally believe this won’t happen, but it shows a sensitivity to the value of the dollar, even though Trump and Xi have both advocated for a lower value of their currencies as mercantilists.)

 

Warning

I have already indicated how wrong I can be. Please be careful in developing your own investment strategy and make changes slowly, not abruptly.

 

 

 

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

Mike Lipper's Blog: Is This The Week That Ends Instability? - Weekly Blog # 924

Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923 Mike Lipper's Blog: Data May Be Signaling Change - Weekly Blog # 922

 

 

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Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

 

 

 

Mike Lipper’s Monday Morning Musings

 

Three Rs + Beginnings of a New Cycle

 

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

 

 

 

Three Rs Describe the Week

The first part of the week in terms of transaction volume on the NYSE + NASDAQ looked somewhat normal, but by midafternoon the world changed. We got the expected ¼ percent cut in Fed interest rates. However, during the press conference Jerome Powell stipulated his lack of confidence in the intermediate future outlook for Fed actions. As the conference went on, selling accelerated. By the closing bell many stocks had fallen, then some fell between 3-5% or more in the after-market. Interestingly, Thursday saw little movement. Trading volume for the first four days of the week was 4.72 million shares. On Friday there was news of one indicator showing inflation likely to decline, which was greeted with 8.13 million shares traded mostly on rising prices.

 

This was the first R, demonstrating the trader’s recalibration of inflation estimates, showing particular strength in techs and high-quality bond prices crunching.

 

The second R saw a further breakdown in the reversal chart pattern of the DJIA and DJTA. (Chart reading is an artform and is not accurate all the time.)

 

The third R, the need to deal with reconciliation of the budget, was perhaps the most significant and became known on Saturday. The final votes in favor were impressive. The House voted 366 to 34 in favor and the Senate 85 to 11. This proved my earlier view that there was no real landslide for President Trump. The American people don’t want much legislation or many executive orders.

 

What Does This Mean?

We live in a world where:

• Most governments are tolerated or downright unpopular.
• Technology appears to create more problems.
• People are afraid of both political and corporate leadership.
• The education sector can’t even run its own campuses safely. They are producing unemployable and over-privileged people only ready for “C-suites”.
• Hard science is not providing much help for the soft science needs of the population.

 

Several examples of not understanding labels hit me this week, emerging markets and large global companies dominated by the five largest firms. The largest firms are attractive because they are exporters to large markets. Thus, to be successful one must be global.

 

Another example is the published list of the 15 best and worst mutual funds. If you are a large investor, the list is misleading. Of the best performing funds, 13 funds were from large fund families, whereas only 6 funds were from large fund families on the worst funds list.

 

Even with AI people need to think more thoroughly.

 

Please suggest what you think the next cycle will look like. 

 

 

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

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

Mike Lipper's Blog: Professional Worry Time vs Amateurs’ - Weekly Blog # 865

 

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An Informative Week with Many Questions - Weekly Blog # 759

Mike Lipper’s Monday Morning Musings

An Informative Week with Many Questions

 

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

                   

 

 

CPI Thursday Morning Pivot or Rotation? 

The readings for the Consumer Price Index and its components were announced before the market opened on Thursday. They were not as high as many expected and market participants treated the less bad news as good news. Many chose to believe the less bad news would embolden the Fed to reduce the size of expected interest rate increases. In effect, the Fed was expected to “pivot”, messaging the market that inflationary increases would be reduced. Their enthusiastic response to the gap opening of the market was not narrowed on either Thursday or Friday.  

 

Market analysts believe that price gaps must be closed before the market can move in the direction of the gap. Most of the time this is the case, but not always. It may take a while. 

 

Market pivots tend to be infrequent, and partially reversed quickly. They can have limited long-term predicative value. However, they can be an early identifier of a meaningful rotation. In this case, the odds seem to favor this pivot not being a significant rotational change. My thinking is based on two inputs. 

 

1.  The mid-term election was largely motivated by a vote against the other side’s leaders and not by a vote in favor of positive growth strategies. Both parties have leadership problems. The Democrats have no fresh leadership with a significant following. The Republicans in some cases did not field attractive candidates and did not match the opposition’s operational talents. With the House of Representatives in the hands of the Republicans, I expect little in the way of new legislation. Many of the expected Executive Orders will also wind up in court. Stagflation will likely be the result. 

2.  Transactional volume will likely be less than expected in a normal bull market. Numerous brokerage firms, investment advisers, and investment bankers, are cutting back on lower producers or those too well compensated.

 

T. Rowe Price Lessons for Investors 

(The following discussion should not be interpreted as a recommendation. T. Rowe is an old personal holding. I have known its CEOs going back to Mr. Price. The firm is investing its capital on broadening its domestic and international marketing and is also developing new distribution channels. Doing so will take time and money to reach the firm’s desired profitability levels. A topic I can address off-line.)

 

T. Rowe Numbers for the Week ended November 11th

• Opened $103.71, closed $133.34 
• Monday-Wednesday share volume in millions of shares:  1.74, 1.85, 1.86 
• Thursday and Friday share volume: 4.49, 5.55 
• Weekly Price Gains: DJ Asset Managers Average +13.92%, T. Rowe +28.57% 
• Institutional Ownership 77.12 % 
• Top 4 shareholders own 26.62 % 
• Thursday’s gap of 5.48% not closed on Friday 

 

While the company is listed on the NYSE, it is essentially an institutional stock owned in some respect by competitors. The size of the price gap and above average gain demonstrates the lack of liquidity on the upside. I don’t know what the liquidity and potential price gap will be on the downside.  

 

Another hint of the professional market dominating the NASDAQ marketplace were the weekly declines as percentage of shares traded: 21.16% for the NYSE vs. 32.85% for the NASDAQ. 

 

Other Thoughts of the Week 

• The IMF believes 1/3 of the world is in recession 
• 7 out of 10 large battery producers are in China 
• With the 2-year and 30-year US Treasury yields at 4.32% and 4.08% respectively, it suggests the minimum expected return on high grade paper will be required for a long time by investors. Could it also mean that this is the maximum safe distribution from high quality accounts in order to preserve principal? 

 

Should real estate investing be divided between current income production and the conversion profits from changing the nature of the property? 

 

Historically, roughly half of small businesses fail within five years. Isn’t it likely this will increase during a period of stagflation? Small company investing has traditionally produced higher returns when large companies are having problems during a stagnant period. However, there will also be offsetting small-cap losses during the period. 

 

What are Your Thoughts? 

 

 

 

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Mike Lipper's Blog: Are You Getting Value from Numbers? - Weekly Blog # 758

Mike Lipper's Blog: Rarely Found Different Thoughts - Blog # 757

Mike Lipper's Blog: Current and Future Views are Confusing - Weekly blog # 756

 

 

 

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A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.