DIFFERENT IMPLICATIONS: DATA VS. TEXT - Weekly Blog # 901

 

 

 

Mike Lipper’s Monday Morning Musings

 

DIFFERENT IMPLICATIONS:

DATA VS. TEXT

 

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

 

 

School Solutions

As taught academically, the critical pivots in teaching both economics and security analysis are the numerical changes of a data series. However, as a long-term investor I am much more interested in the mood changes hinted at in textual renditions. While data precisely represents the past, text allows the reader/student to think about one or more different futures. This is why I believe philosophy or similar courses should include both economics and security analysis in their teachings.

 

Below is a brief listing of several data points describing last week (Implications italicized and discussed in parenthesis).

• Year-to-date Stock Transaction Volume: NYSE 7.11% vs NASDAQ 37.30%

(Five times greater in the younger, more speculative market, even if some of the NASDAQ is inventory swapping among dealers. Speculation normally leads to extreme up and down prices)

• Inflation Signals: The ECRI Index tracks industrial prices weekly and it normally moves gradually. Last week it rose +1.70%.

(I believe this was in response to the tariff news at the end of the week. Some market participants believe there will be industrial price increases soon).

• Participants in the AAII sample survey are increasingly worried about a down market in stocks, but others are not.

(Comparing the bullish and bearish projections of last week with those 3 weeks earlier. Bearish projections rose to 43.7% from 34.8% 3 weeks earlier. Bullish bets only rose to 34.9% from 33.6% for the same period, suggesting bears see reasons to be worried while bulls do not. Only one will be right over the next six months.)

• Equity mutual fund peer group averages +10%. Only one US Diversified Fund (USDE) peer group average has generated returns exceeding 10% year-to-date, multi-cap growth funds. Forty other peer groups have generated returns exceeding +10%, although they were less diversified.

(USDE Funds hold more assets than the other peer groups, which suggests being a holder of US equities was not a winning hand for most.)

• Investors need to be careful that the earnings reported are not accounting constructions. The London Stock Exchange Group (LSEG) and I.B.E.S. estimate that the S&P 500 Index will report a +8.3% gain for the 3rd quarter. However, they further estimate that corporate net income will rise only +6.3% for the quarter. Thus, 24% of reported earnings will be attributable to buybacks and other accounting techniques.

(Investors need to understand what they are paying 20x-earnings or more for. Hopefully, operating earnings can be repeated while earnings created through accounting cannot.)

 

Conclusions:

There are lots of reasons to be cautious. Some reserves should be considered a hedge for future down markets. However, this hedge should be viewed as a temporary buying reserve until prices more appropriately reflect the long-term value of accepting normal risk.

To aid future generations of investors as well those today, security analysis and economics need to be taught with a fuller understanding that it rests on the strength of ever-changing language.   

 

 

 

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A. Michael Lipper, CFA

 

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The Strategic Art of Strategic Selling - Weekly Blog # 850

 

         

Mike Lipper’s Monday Morning Musings

The Strategic Art of Strategic Selling

 

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

 

Playing the Game to Win

Playing baseball, producing a great painting, or writing a great piece of music, depends on many moves beyond a single swing of a bat, a great color, or a single melody. It is the same managing an investment portfolio. Amateur investors often evaluate two to hundreds of individual securities to choose a single security to sell.

 

Investors acting as long-playing professionals consider a myriad of factors in making the decision to sell a portion of their assets. The sole decision should not be based on the odds of the price of a security rising or falling a meaningful amount in a significant time period. The purpose of this blog is to examine the other factors one should consider.

 

A well-considered security contributes to the rising or falling of prices for the entire portfolio, in part as a result of its weight in the portfolio. Some managers may want to equal weight their components, but time creates changes in weighting. Other managers may choose to heavily weight some positions or have a portion of their portfolio as a "farm-team". This allows them to avoid missing the right idea, without making a significant commitment. One way to reduce daily volatility is to have a large number of positions, at the expense of near-term performance.

 

Other ways to examine a portfolio is to evaluate the risks the portfolio manager chooses to take. These include some of the following:

Inflation

Foreign Exchange

Political Risk

Critical Personnel

Legal Concerns

Tax Risks

Concentrated Personality Risks

Engineering and Manufacturing Risks

Other Risks

 

One of the bigger risks is owning too many speculative stocks with inexperienced shareholders. Warren Buffett, in managing Berkshire Hathaway (*), adjusts the size of some of his larger positions and/or hedges some holdings with others.

(*) Positions held in managed and personal accounts.

 

Some Clues in Plain Sight

• Industrial prices, as measured by the ECRI, are slightly lower than a year ago.
• The implications of having large short positions may not be as negative as it appears. Some of these may be short against the box.  (Short position offsetting similar long positions. Possible examples are Franklin Resources 7.72% and T. Rowe Price 4.21 % of float. Both are held in personal and client accounts)
• There are approximately 5 times the number shares traded on the NASDAQ vs the NYSE. This suggests that in a low-volume week the remaining trading interest is speculative.
• Studies indicate tariffs are inflationary and will lead to declines in employment, growth, and competitiveness.
• James Mackintosh, a WSJ columnist, suggests the market is very expensive using 3 measures of CAPE adjusting for inflation the S&P 500, and the Fed model. (If one looks at long-term rate of gains performance records. They decline over time, the longer the period the lower the rate of gain and are below the spectacular performance of high-performing stocks. This probably means large gains now are eating into longer-term performance results.

 

Question: Does anyone see parallels to the period between the assassination of the Archduke and the beginnings of the actual conflict and starting WWI?

 

 

 

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Mike Lipper's Blog: Investment Second Derivative: Motivation - Weekly Blog # 849

Mike Lipper's Blog: Fear of Instability Can Cause Trouble - Weekly Blog # 848

Mike Lipper's Blog: Detective Work of Analysts - Weekly Blog # 847

 

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A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

 

Investment Second Derivative: Motivation - Weekly Blog # 849

 

         

 

Mike Lipper’s Monday Morning Musings

 

Investment Second Derivative: Motivation

 

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

 

 

 

Useful Investment Process 

Far too many people entering the investment arena start with the choice of what security to buy. I suggest that is like baseball, swing at the first pitch and each next pitch, this gives the pitcher/catcher an advantage with each subsequent pitch. However, characterizing each pitch gives the batter some of the lost advantage. With no disrespect to the titans of the diamond, this approach is unlikely to be sufficiently successful in the investment game.  

 

The second derivative is critical for a long duration of successful investing. The key to understanding why it is critical is based on the realization that every factoid is derived from a competitive drive in the investment game, and it is not limited to only future investment performance. The media is competing for “eyeballs”, audience, future investment banking opportunities, the listing of events, relative industrial rankings, reputations, etc. The first level of understanding of any factoid directed at the investor is understanding the motivation of the sender. While the real motivation is almost never publicly revealed, a juxtaposition of past factoids or positions will often give a clue as to motivation. One useful screening approach is to gather inputs from different sources. In general, small bits of information are especially useful, particularly with some misinformation.   

 

Below is a current almost random list of factors that can lead or mislead in making critical judgements, at least until corrections appear and the exercise begins again: 

• The change in industrial prices year over year was -4.16%. (This suggests that manufactures selling to industrial users may be in contraction.) 
• A somewhat parallel view can be drawn from the table of weekly prices published in Saturday’s WSJ, where only 38% rose while 62% declined. (These two price views do not cover services, which represent about 70% of the US economy.) 
• Despite price pressures caused by low transaction volume, financial buyouts have not been easy. Hargreaves, Lansdown was finally sold after four attempts. 
• US sales of electrical vehicles have been slower than in China. More than half the cars sold in China were electric or hybrid vehicles. 
• Chinese bond yields 2.13% 
• Investors around the world are investing in Bond ETFs, which suggests to me there is liquidity risk in the future. 
• Since the time of Mao, Chinese Party leaders have visited together in the seaside resort of Beadle. They appear to view the main democracies of the world as weak, both politically and defensively. These democracies are underspending on their military by 300+%. They believe time is on their side. 
• A relatively high valuation for many equity pools suggests we do not have the resources to solve enough problems to fund our futures. 

What are your indicators that will produce investment returns similar to what we have enjoyed in the recent past?  

 

 

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

Mike Lipper's Blog: Fear of Instability Can Cause Trouble - Weekly Blog # 848

Mike Lipper's Blog: Detective Work of Analysts - Weekly Blog # 847

Mike Lipper's Blog: Our Self-Appointed Mission - Weekly Blog # 846

 

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.