Generally Good Holy Week + Future Clues - Weekly Blog # 885

 

 

 

Mike Lipper’s Monday Morning Musings

 

Generally Good Holy Week + Future Clues

 

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

 

                             

 

Holy Week

The driving celebration of the week ended Sunday was the three dominant religions being able to conduct their Services peacefully. The US stock market contributed four days of generally rising prices, although there were clues related to critical concerns.

 

First, a slightly smaller percentage of NASDAQ stocks rose in price (59%), vs. 69% on the "big board". NASDAQ prices are generally more volatile and have a more professional audience than those on the followers of only New York Stock Exchange (NYSE). NASDAQ stocks have outperformed NYSE stocks for some time and one could conclude that their participants are more clued in than NYSE followers.

 

In considering our domestic markets, we should not forget our present and future are influenced by global actions. For example, last week the older western European stocks on average did better than our domestic stocks, even though they will be impacted by various tariffs and recessions. The twin concerns, tariffs and recessions, were the main worries during the four-day market week. As a contrarian thinker I believe both concerns are not properly focused.

 

I believe President Trump is using the threats of tariffs primarily as a force to begin a much larger, more powerful, and more difficult conversations. These conversations can be lumped under the label of non-tariff trade barriers. No single law or regulation will cover all these topics. They can only be addressed by the heads of the various countries, which Trump hopes will be brought to the negotiating table or private discussion by the threats of large tariffs.

 

Trump believes there are two main areas where the US is being disadvantaged, local trade restrictions and manipulated foreign exchange rates. Additionally, he believes only the most senior people can reach an effective compromise and he is willing to adjust US tariffs and other factors to reach his objectives. If I am close to being correct there is no telling what the ultimate results will be, as all negotiations will need to be reviewed in light of competition with other countries. Thus, we need to pay attention to the various twists and turns that will take place, to the extent they are revealed, and not to jump to any conclusions.

 

The second conundrum facing us as both citizens and investors is recognizing that periodic economic declines are inevitable. The world has not repealed personality traits, the impact of technology, nor climate conditions, which will all impact our financial condition.  

 

Goldman Sachs Studies

Goldman believes the odds of a US recession are getting higher. They studied the history of recessions and were able to divide the past into cyclical and structural recessions. On average, cyclical recessions end within a year and structural recessions average twenty-seven months.

 

My Most Fearsome Concern

We have all learned that history does not repeat itself, but rhymes. Thus, as an analyst my first exercise is to look at the worst decline the US has ever experienced, the Depression. As there is almost never a single individual who causes a major economic change, it is a mistake to label the cause of the Depression under a single name.

 

The 1920s was a period of rapid expansion of debt and even looser morals. By the end of the decade, both farmers and smaller banks were heavily in debt. To bail them out congress came up with the Smoot­-Hawley tariffs. (Similar to today, politicians were counting votes, while the financial side of government was concerned about the debts of dealers who had farmers as clients, as well as local small banks. The latter was such a concern that when FDR campaigned, he promised to keep the banks open then immediately close them after coming into power. To some degree, this experience may be like today's tariffs.)

 

When FDR came in with his "brain trust" of Harvard professors, they sought to change much of how the country was to be governed. (Somewhat similar to how edicts from the Supreme Court and other judges have been used to force change.)  

 

Much of what President Trump and Elon Musk are trying to accomplish is structural. Even if they can find effective people to carry it out, it will take a while to deliver the new ways of doing things to the marketplace. On the basis of the above thinking I fear the next recession will be structural, lasting a few years. I hope I am wrong.

 

Question: What do you think?

 

 

 

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A Rush to the 1930s - Weekly Blog # 875

 

Mike Lipper’s Monday Morning Musings

 

A Rush to the 1930s

 

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

 

 

 

Historic Background

The President comes from a Brooklyn Democrat real estate family background. Many of his actions are similar to FDR’s moves in the 1930s. Like FDR, he is running into opposition from the courts. As with FDR, he wants to lower the value of the dollar. FDR raised the price of the dollar by 60% for non-US citizens and residents, the impact of which contributed to a worldwide depression and was a cause of WWII.

 

In the US

The job market is cooling, and the investment market is changing. As noted by George Gatch of JP Morgan Chase “more than half of total flows into the asset management industry comes from the wealth management segment which is now driven by brokerage firms shifting their sales forces to fee earning investment advisers from formerly registered representatives. While some of these advisers will manage this money through the dictates of the firms, a number of the advisers will act more independently”. (Whether this may increase the likelihood that these assets become more or less “sticky”, we will see.)

 

Equity markets in the US have become less homogenous than in the past. For example, in last week’s trading 48% of NYSE stock prices declined, while 52% declined on the NASDAQ. The volume of trading on the NASDAQ is about 7 times that of the “big board”. (This is a bit misleading as there is more intra-dealer trading to maintain position sizes in the over-counter market.)

 

Historically, one of the least reliable predictions comes from the American Association of Individual Investors (AAII) weekly sample survey. Over the last 3 weeks bearish investors have risen to 43% from 29%, while the bulls have dropped to 33% from 43% and are now a minority.

 

While we do not use commodities as investments, we do follow their prices, which are traded in very professional markets. Of particular importance is the price of copper, which has risen recently. This echoes the increase in the ECRI industrial price index, which rose this week for a +4.97% year over year gain.

 

An Unexpected Turnaround

Long-term investors often examine the potential for a totally unexpected turnaround. I have no reason to expect this change and can think of many reasons for it being improbable. However, the implications are so large that it is intriguing.

 

The two largest economies in the world are the US and China. Many believe the US will continue to grow for the foreseeable future. I have not seen any “expert” who is bullish on China. Nevertheless, through ancient times China was one of the wealthiest countries in the world. Many Chinese work hard and are world class business and intellectual leaders. The Chinese capital markets appear to be in disarray and are suffering meaningful deflation. I recognize that the level of trust between the two world leaders makes cooperation difficult, but the potential value of cooperation for both participants is enormous. Perhaps, our grand or great grandchildren will solve this rich puzzle.       

 

 

 

 

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Alternative Futures - Weekly Blog # 827

 

      

Mike Lipper’s Monday Morning Musings

 

Alternative Futures

 

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

   

 

       

Could the Future be Better?

While most stock indices are rising, most bond indices are falling.  Normally, fixed income investors are more risk aware than future oriented stock buyers and owners. Some near-term economic indices are rising, while public company managers are laying workers off. (Each worker is an investment of the company, which represents a reinvestment cost if eventually replaced.) Why is this happening when current sales are reasonably acceptable? To many businesspeople, their next planning period look bleak, despite what many political leaders say.

 

The current President is rushing into the 1930s FDR future. This has been magnified by an employment shortage in the prior engine of world trade growth, China. The general assumption in the US is that the current leadership won’t change.

 

 Will it be a Presidential election or one determining the leadership of the two Houses of Congress? According to Nikki Haley, 70% of voters are unhappy with the current candidates likely to lead their tickets. On day one in their next office, they will both be lame ducks. The Presidential term is 4 years, whereas the senate term is 6 years, and they often serve more than a single term. There is considerable evidence that a significant number of voters will decide to stay home on election day. Within each party the centrists tend to be the people not expected to vote. This will magnify the voting power of fringe voters. This was the reason the “State of the Union” speech was directed at tarnishing the other party, rather than at lauding the accomplishments of the party in power. (If this creates a “Nixon moment in the White House it could lead to both leading candidates being replaced. Kim Strassel of The Wall Street Journal said, “Both presumptive presidential nominees are so weak that they’d lose to virtually anyone else”)

Perhaps more important to the world is the statement by Xi, the paramount, but not sole leader of China. He is advocating “High Quality Development” = National Security, Political Stability, and Social Equality. With 90% of the population in the private sector, the level of employment is critical for stability. (China has a history of rebellions starting in the south, with some succeeding in changing the government. Their military posture is more defensive than offensive. However, their defense budget increased 7.2%, which does not include the 30-35% spending on science and space.

 

Other Items of Significance

• Fidelity International announced a layoff of 9% of its global workforce.
• AAII sample survey shows 51.7% bulls vs 21.8% bears, which is an extreme contrarian reading.

  

 

 

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

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Mike Lipper's Blog: What Moves the Stock Market? - Weekly Blog # 824

 

 

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Bullish Chatter Leaves Out Useful Info - Weekly Blog # 826

 

      

Mike Lipper’s Monday Morning Musings

 

Bullish Chatter Leaves Out Useful Info

 

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

   

 

       

Public Service Announcement

Assuming you have been unable to avoid the bullish chatter from various media pundits and investment organizations, I will not repeat the positives on investments. Instead, I will file a “minority report” of little-known negative factoids to give some balance to your thought processes.

 

Layoffs Continue

Most publicized layoffs are from durable goods producing companies. It is the service providers that really drive the US economy, contributing over 70% to GDP when the service functions of manufacturers are included. When service companies encounter economic difficulties, they tend to cut back gradually rather than in lump sums. They are also less unionized and tend to provide fewer announcements. I therefore tend to pay more attention to the layoffs of service companies. That is why when Expedia announced this week that it is reducing its workforce by 9% it is worth paying attention. It is probably the tip of the iceberg above the waterline.

 

Rare Counter News

The senior strategist for JP Morgan Chase suggests we are in a period of Stagflation (slowly rising prices and wages). The clue to this analysis is the most prominent portrait in the White House main room where the current President meets foreign dignitaries and congressional leaders. It is no accident; the current White House occupant’s favorite President was FDR. In the second half of his term which converted a cyclical recession into a period of stagflation.

 

When the Public are Invited into what was Formerly Private, Beware!

Private lending has historically been conducted exclusively between a single borrower and a small number of financial institutions; all without the “benefit” of government review. Some financial firms are now offering pieces of private credit to the “unwashed” public. It is not only because some members of the public have accumulated cash, but also possibly due to federally sponsored inflation. Some believe there is now more risk in private credit than in the past.

 

Speculators are Buying More Than Institutions

In the latest week, 39% of the shares traded on the NYSE were at rising prices, with 60% on the NASDAQ going up. I suspect there was more institutional volume on the “Big Board”, with some having a longer-term outlook than the public or their advisers.

 

Be Careful of Labels

Many market prognosticators currently worry about the size of the gains chalked up by large “growth” companies, advocating for a switch to small caps. As someone who has invested in both individual small caps and more significantly in funds invested in smaller caps, I am concerned that the data used to support their long-term desirability is faulty.

 

Compared to larger stocks there is a problem with the data due to survivor bias, both for the winners and losers. Some wonderful or seemingly wonderful companies have had their history cut short by being acquired. At times, some of these companies are sought after because of apparently superior products, leadership, or customer base.

 

The sellers believe that the price paid compensates them for giving up some of their potential gains, but it also assumes it reduces their business and personal risks. Many performance histories capture their partial performance for the extended period in the published record, as the history of bankrupt companies is kept in the small-cap record. Additionally, the significance of the bankruptcy record is diminished due to their prices typically being much smaller than most acquired companies.

 

This data concern should not rule out investing in small-caps, although it suggests small-caps are neither a plus nor a minus for selection. Similarly, college selection should not be based solely on first grade class ranking.

 

Stock Selection vs. Portfolio Management

There are many ways to win or lose a football or baseball game. Some variables deal with the play of a particular contest, while others must consider the season, player development, audience development, funding needs, and the career progress of key individuals. Sounds complex!

 

A similar set of puzzles are used to solve the issues of stock selection and portfolio management. In this country, a large portion of the population has an opinion on how the game should have been played, at least for the audience. Predictability improves as one lengthens the time from a single game to a season. For companies, factors like the number of years, loyalty development, and careers might be important. In the fullness of time the last two periods are the long-term payoffs for the real winners, who are small in number but rich in experience and profits. For the most part, success can only be achieved through experience. There is very little written about how to achieve success.

 

Turning to successful long-term investing, the same complexities exist.  These are the problems I face in my life work. Producing these weekly blogs is one way I hope to think through the issues. Unlike some great investors, I limit my focus to individual equities and funds, excluding fixed income, commodities, and critical sources not in English.

 

You Can Help by Sharing Your Experiences, Particularly When You Believe I Am Wrong. 

 

 

 

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

Mike Lipper's Blog: What Moves the Stock Market? - Weekly Blog # 824

Mike Lipper's Blog: Picking Winners/Avoiding Losers - Weekly Blog # 823

 

 

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Changing Steps - Weekly Blog # 807

 

Mike Lipper’s Monday Morning Musings

 

Changing Steps

 

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

 

 

Reason for Cycles

Throughout human and geological/climatic history one can detect repeated periods of similar, but not identical elements. These periods are often immediately opposite prior cycles. Humans tend to be coin flippers. On the one side is greed and on the other is fear. Both are motivated by a desire for qualities we don’t have in sufficient quantities, the assurance of safety from others. The longer we suffer from the perceived deficit, the greater the perceived need.

 

In the natural world dominant forces are eventually met by counter forces, which brings them back to some form of equilibrium. Both written and geological history record frequent but irregular cycles. History records the existence of cycles, but not the motivations that created them. Literature about historic events tries to fill this gap, although it is disadvantaged by those hoping to curry favor with the winners and their write ups.

 

Futurists

Many people are content to take one day at a time and not focus on the future. Those of us responsible for doing something today for future beneficiaries recognize that we will be judged by the conditions that exist when beneficiaries get “their” assets. We are thus cursed by future perceptions of how we deal with investments today.

 

Where Are We?

Many of us have traveled with children or other impatient people who repeatedly ask, where are we? Or worse, when will we get there? In truth, we don’t know. It is the same in dealing with investors, or worse, their “gatekeepers.”

 

Tell The Truth

Most of the time in traveling through the investment cycle we don’t know where we are going or when the cycle will end. My approach is to share my current thinking, including identifying many things that I don’t know. I always try to look for clues that could possibly identify a change in direction.  I risk will be wrong some of the time before I recognize my mistakes. I believe we are in the early stages of an important change in the behavior of this cycle.

 

The Beginning of a Cyclical Change

(I hope my clients and beneficiaries forgive me for not getting the right decisions quickly enough.)

 

Evidence List

1. Lowest number of sales of previously owned homes since 2011.
2. Yields on 30-year Treasuries have broken above 5%.
3. Change in Leading Indicators, -9.67% for last 12 months.
4. Private Equity and Credits are struggling to find new clients, including the public, which is usually a sign of increased risk.
5. Fixed income-oriented funds have lost money for 3 years, some for 5 years. Funds invested in alternatives, value, and small company growth, are also struggling to perform.
6. If October stock and equity fund performance ends with a decline, the major averages will have declined for 3 months. The equally weighted S&P 500 Index has fallen this year.
7. It is possible the average stock may finish down for the year, completing a 3-year period of stagflation.
8. At current or higher interest rates, money previously invested in stocks may get invested in bonds, both by the public and by pension/retirement funds.
9. We are seeing signs of deflation in that sales discounts are showing up. Some may conclude President Biden is repeating FDR’s mistakes, which won’t end well and may possibly include a war.

 

Shopping List of Potentials

A number of well-known, former leading companies have new managements who have shifted their focus from building returns for shareholders to instituting policies that appeal to socially oriented institutions. This is particularly true for financial service companies, a sector likely to see more concentration. It is probably too soon to buy them, as they are likely to have a few more periods of less than good earnings ahead of them. These companies will either shrink to unimportance or will be better served by new management and owners.

 

Currently, most small companies are valued at half or less than large companies in terms of P/E or Price/Book value. These small companies are often better managed and more focused on investment returns. They could be the source of critical people and the attitudes needed for a turnaround.

 

Question: Are you looking for turnarounds?

 

 

 

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

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Prepare to be Bullish, Long-Term - Weekly Blog # 804

 

 Mike Lipper’s Monday Morning Musings

Prepare to be Bullish, Long-Term

 

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

 

 

  

(N.B. in classical documents was a Latin warning for the reader to be prepared for elements of disbelief. Subscribers are likely to disagree with some or all points made. Nevertheless, they should be digested, even though they might question your firmly held beliefs. Some of these thoughts might even reinforce your own beliefs. In medieval courts there was often a paid clown or “fool” who might cleverly utter some thoughts that no one else would dare say. Perhaps, this is the role of this blog.)

 

Focus on the Finish Line

Almost all commentary about the market, economy, and individual prices without attempting to identify the end period outcome is lacking. One lesson from the racetrack was the order of finish from a particular race. The payoff parade was the actual running of the race, not any of guessing, analysis, or handicapping bettors did before the race.

As both an investor and a registered advisor, I attempt to make a guess at either the actual or relative return after an extended period. The minimum time period I am comfortable using to make an investment decision is five years. One reason I pick five years is a lesson learned at the track about the element of surprise, or “racing luck”, in any given race. In longer races there is greater opportunity to recover from a surprise than in shorter races. The second reason to focus on a five-year period was highlighted by the communist party. (I suspect they copied various business plans in the 19th century by instituting a 5 year political term.)  Many CEOs also negotiate a five-year term with their board of directors for incentive compensation. 

 

2028!?

Most money in the securities market is invested to meet retirement obligations or long-term capital expenditure needs. Those responsible for attempting to meet these needs should be judged by their performance over longer periods.

 

While you can never clearly identify the type of period we are presently in, I think it is the responsibility of the investor to make his/her best guess, as the type of market will probably impact the results.

 

2022 Change

While no single event is likely to change the direction of society or the economy, there is often a headline occurrence which can serve as a useful label. The single change that became a turning point for me was the COVID Pandemic. The Black Plague occurred centuries ago, and there were serious pandemics in the Spanish Flu in the1920s. However, for the most part pandemics in the modern era have been rare.

 

The reaction by the US government, led by the teachers’ union, materially changed the progress of society. Focusing exclusively on the securities markets, 2022 was a down year, due to curtailment of work and formal education. Governments rarely let a crisis go to waste and by 2023 government expenditures and curtailment of selected industries had enhanced inflation. Appropriate parallels were made with FDR’s elongation of a recession into a depression. 

 

First 9 Months of 2023

Perhaps it is ironic that little New Zealand’s central bank was the first to call for a 2% inflation goal and have its current indices generate a minus in front of them. The US may not be far behind, with Real Estate -5.4%, Consumer Staples -4.76%, Healthcare -4.09%, and most concerning, the S&P 500 equal weighted up only +1.79 %.

 

Where’s the Upside?

Almost all life is cyclical, with the largest gains resulting after major declines. The longer the current period of stagflation, the longer the hidden actions of building future earnings power will be at work.

 

On a longer-term basis, continued federal government deficits are a symptom of important twin deficits. Capable management throughout society, and the inability of the educational system to produce students suitable for current jobs. From pre-K to PhD, schools are producing unmotivated students who are ignorant of the world and irresponsible, primarily due to the views of their instructors.

 

Parents and employers are slowly exerting pressures for change, while businesses are evolving to meet the current needs of their customers. A non-recommended example is ADP, a company in our private financial services fund. The company started 74 years ago as a payroll service business. Today, with over one million clients, they have evolved into a Human Capital Management business providing a much larger contribution to their clients. 

 

The Public Accounting Oversight Board has stated that they are finding an alarming number of errors in audits. We are finding the same trend in providing many services to clients, which presents an opportunity. One other opportunity might be the mismatching of expected industrial demand for “modern” cars, data centers, and equipment to change the climate. To support these efforts there is a need for large quantities of high-grade steel production and there are no provisions to expend production.

 

Savings, possibly the biggest contributor to the value of stock prices in 2028 will be in the hands of a new generation of political leaders and managements of profits and non-profits. Hopefully they will make better decisions than in the recent past.

 

Please share with me your thoughts.

 

 

 

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Mike Lipper's Blog: Selling: Art & Risks, Current & Later - Weekly Blog # 803

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Selling: Art & Risks, Current & Later - Weekly Blog # 803

 

Mike Lipper’s Monday Morning Musings

Selling: Art & Risks, Current & Later

 

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

 

 

 

Most Difficult Decision

After a decision is made to purchase one or more securities the level of complexity escalates through one or more holding periods. The act of selling has immediate performance implications, but also has implications for the rest of the lives of the investor, their inheritors, and various governments. Because of these implications, the decision process should consider factors wider than the simple decision to purchase.

 

Decision Making

Individual investors often start their investment process by thinking about “their” money and its personal use. Over time their thinking may broaden to include their responsibilities, leading them to start thinking of themselves more as fiduciaries. Most investment money, including that in various institutions, is managed with fiduciary principles in mind.

 

However, when we bring a professional fiduciary into the picture, the decision dynamics evolve. The fiduciary unsurprisingly wants to be compensated. More importantly, in our litigious society fiduciaries want to avoid being sued. Most suits are decided on the basis of the 1830 Putnam vs Harvard (Prudent Person) case, which holds the fiduciary performance standard to what other prudent people would do with their money. This is a backward-looking judicial view. (This approach created the performance measurement business, which benefited the author and my various associates.)

 

While this approach is addressed by the so-called “Prudent Person” decision process, it doesn’t make a lot of sense for a forward-looking investor. For example, if a manager stays fully invested in a speculative securities market decline and vastly underperforms a more diversified portfolio, he would be judged imprudent for the declining investment period. However, if the measurement period included the recovery and a subsequent growth period, the entire period might be much longer than desired for a more conservatively managed account.

Where Are We Today?

Since we look at investing through short to long-term periods, the following views express an opinion, not a prediction as to three stimuli.

• Investors are fleeing China, driving many prices down. If you are a trading investor who values short-term performance, it might make sense to reduce exposure. However, there are two reasons that suggest the opposite.

1.    Betting against volume normally works better than the opposite.

2.    Without the growth of Chinese exports, world growth will be constrained.

• The three major US stock market indices had a dull to sloppy week. The S&P 500, representing the bulk of investor’s capital, fell slightly through a technical barrier. While not a prediction, it could suggest the calendar year might finish with small gains for the year. If that turns out to be true it would confirm we are in a period of stagflation similar to FDR’s depression and a model for Joe Biden.
• All three dominant political leaders: Biden, Trump, and Xi, were/are concerned with the need to create employment opportunities for younger voters and spenders. History shows others using effective ways to accomplish this goal.
• In ancient Rome, legionnaires were awarded captured farmland to provide food for Roman staff. It also served to cultivate political capital. The building of the viaducts was also needed to bring food to Rome.
• President Eisenhower pushed a national highway system, which improved interstate commerce and employed private workers. Ike had the benefit of several knowledgeable brothers, which were Presidents at local banks and Universities.
• Xi has possibly built the biggest and fastest railroad system in the world. US rail and airport infrastructure is way below many third world countries.

Now it is Your Turn

The ultimate value of these blogs is to raise discussion of these controversial views. Let’s hear from you.

 

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