We Have a Management Problem - Weekly Blog # 935

 

 

 

Mike Lipper’s Monday Morning Musings 

We Have a Management Problem

 

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

 

                         

 

The Founding Fathers Saw it

When unsuccessful in getting George Washington to accept the title of King they decided to name him President, a person who presides over others that are powerful. Notice, they did not choose Executive or Manager. Interesting.

 

Today, the elected leader of the country comes from the commercial world and governs as a Chief Executive. Interesting. The difference between the two labels is that the presiding officer needs to work with other elected officers and not command his or her views become absolute commands.

 

Different Styles = Different Results

The largest owner/leader of a private family company has only the marketplace or regulator that prevents almost complete dictatorial power. This is reinforced by having family members in the named positions. It is worth noting, rarely if ever is one of the senior family members hired away to run a separate public company.  Interesting.

 

One of the realities of managing a successful company is that senior people are often hired away to run competitive companies. GE, JP Morgan Chase*, and Apple* are good examples.

* Indicates shares owned in personal and managed accounts. Interesting

 

The Selling Problem

Emotionally, selling is much more difficult than buying. Afterall, buying is an act of new faith in both a stock and the individual making the decision. At the time of purchase the stock position is the single best bet the investor can make.

 

Selling sometimes involves disappointment in the stock or can be the need for account liquidity. It is like the pain of selling one’s children or losing a personal extremity, but at the time of sale it is the least loved stock in the portfolio. Emotionally it is relatively easy to set up a buying program that purchases a position over time, such as buying a certain number of shares each month for the next year as one gains conviction. However, selling is an entirely different mindset as it is painful to lose a limb or a child, the quicker the better. That may be why more shares have been sold at declining prices on down days for the last six months. Since selling is more emotional it probably makes tactical sense to sell over time. Interesting

 

Reasons to Consider Selling Programs

1. The US has the highest inflation rate of all the advanced economies.
2. Iran has a functioning economy, despite the bombing.
3. There are only 3 mutual fund sector averages that beat the +13.66% 10-year compound average of S&P 500 index funds; Science & Tech +17.82%, Precious Metals Equity +16.77%, and Large-Cap Growth +14.61%. My guess is that it is unlikely these three sectors will outperform the average US diversified fund’s return of +11.16%, nor will they produce double digit gains in the next 10 years.
4. The “Hyperscalers” are commodity players that depend on the long-term prices of fuels for their plants.
5. The Walmart (stock) Recession Signal +10.89% vs the S&P Luxury Price Average -14.8%.
6. Fixed Income strategies in the future won’t follow historical patterns.
7. The President has borrowed the most money and runs the government with biggest deficit. They are urging retail investors to buy debt securities.
8. Ray Dalio believes in the histories of recessions, concluding we are currently in stage five on the way to six.
9. Fitch has noted that the default rate on private debt has risen.
10. The ECRI industrial price index has risen to 135.06, which is a +14.21% increase in the last 12 months.          
11. Note: The job gains for March included jobs for healthcare, which require larger amounts of social assistance and produce less GDP per person.
12. Homer Jenkins Jr. noted in the WSJ that “Trump is a lame duck with low appeal and a surplus of voter distrust.” 
13. We won’t have peace in the middle east until Iran’s sponsorship of death and destruction in the US, UK, Europe, Mideast, Africa, and Asia ends.

 

Interesting. Be Careful                                    

                                        

 

 

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Mike Lipper's Blog: Is History Rhyming Again? - Weekly Blog # 934

Mike Lipper's Blog: Bifocal Analysis: Short & Long-Term - Weekly Blog # 933

Mike Lipper's Blog: This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932

 

 

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Bifocal Analysis: Short & Long-Term - Weekly Blog # 933

 

 

 

Mike Lipper’s Monday Morning Musings

 

Bifocal Analysis: Short & Long-Term

 

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

 

 

 

Short-Term

The data is so negative that brief and violent rallies are to be expected. Net stock selling has consistently outpaced buying for each of the last four weeks. For example, 85% of the NYSE stocks and 81% of NASDAQ stocks fell in the latest week. As Barron’s noted “cash is looking more appealing since stock market hedges, bonds, and gold are no longer working.” Employers are barely replacing the more expensive retiring labor in most manufacturing functions.

 

There is a new player in the game, private credit. For the most part issuers of private credit instruments don’t qualify for bank loans, and they don’t have long credit histories either. Much of this paper is held in new funds, which are being sold to retail channels. When one of these loans gets in trouble it is referred to as a “cockroach”. Jaime Dimon, the CEO of JP Morgan Chase (*) warned that where there is one “cockroach” there is likely to be more.

(*) JPM shares are owned in managed accounts.

 

Market analysts are concerned that the S&P 500 Index has been locked in a narrow 300-point band for the last four months, with optimists and pessimist exchanging positions. This week, the lower boundary line was briefly pierced. If the “500” drops 3% more, then the 400-point range will become a difficult region for the market to rise beyond for quite a period. This fear may briefly spark some rallies from the derivative and short players.

 

Longer-Term Implications of History

One purpose of recorded history is to explain what happened, at least in the eyes of the winning survivors. The survivors, or their intellectual heirs, construct rules as to why certain actions are repeated. If there are enough repetitions the rules become dictum, even though the battle conditions are different. We are taught from a very early age to follow rules without an understanding of the conditions that created them. This blind acceptance of rules has led to occasional great mistakes in politics, the military, sports, families, business, and of course investing. Historic labels often become shorthand for rules. For instance: Adam and Eve, George Washington, the NY Yankees, Democrats, Republicans, Chopin, etc.

 

As has been noted before, I learned basic analysis at the NY racetracks. One great lesson from racing lore was Man of War, which had 25 winning races in a row but lost his last race to an unknown horse named Upstart. Proving unexpected things can and occasionally do happen. My self-appointed task at the track was to guess the chance of the unexpected happening.

 

Applying the racetrack experience to investing I looked at the historical record of Warren Buffett and Charlie Munger for stocks and companies in which to invest. In an oversimplification there were at least three characteristics the winners had in common, the nature of customers, the characteristics of the workforce, and the discipline of integrity. (I suspect the last was penned by his long-term counsel and director Ron Olson, a fellow ex-trustee of Caltech.)

 

If the US stock market does decline materially in the period ahead, I will try to apply the track lessons learned. Charlie Munger taught Warren Buffett it was better to buy a good company at a reasonable price and not wait for a cheap price. For many years there were great companies we didn’t own because they were selling way above a reasonable price. I expect a number of these “beauties” will be available at reasonable prices during the next depression.

 

Next Depression

I don’t know when it will happen but based on human nature, I expect it to happen. The US has had only four Presidents that were restructurers: Andrew Jackson, Teddy Roosevelt, FDR, and Trump. Below are some parallels to the 1930-1942 depression:

• Each challenged the constitution and fought with the courts
• Weakened the controls on the banks
• Set the stage for war
• Weakened the currency
• Encouraged the retail public to invest in speculative vehicles
• Changed how the US was governed
• All Presidents, except Andrew Jackson, were involved with Japan

No historical comparison is identical, and the future may be different than the past, but odds favor a closer similarity.

 

Please share your views, there is much to learn.

 

 

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Mike Lipper's Blog: This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932

Mike Lipper's Blog: Premature: Buying Program to Begin Soon? - Weekly Blog # 931

Mike Lipper's Blog: Expectations Changing? - Weekly Blog # 930

 

 

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Bad Comparisons Can Lead To Faulty Conclusions - Weekly Blog # 905

Mike Lipper’s Monday Morning Musings

 

Bad Comparisons Can Lead

To Faulty Conclusions

 

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

 

 

 

Your Portfolio vs. Stock Indices

The biggest trap the media and sales community set for both institutions and individual investors is comparing portfolio performance with a stock index constructed by a publisher. The best US stock market index is probably the S&P 500 Composite (SWX is its symbol).

 

The index is published by Standard & Poor’s Global (*), whose components are selected by data analyst editors, not investment managers. In a performance year where a company splits into two or more publicly traded stocks; the index carries each component of the former stock for the performance year. That is why the SWX measures slightly more than 500 stocks at times. Additionally, almost every active investor’s portfolio contains some cash or similar instrument. In periods of large gains or losses, the performance of non-equities will affect the performance of an account, but not the index. Furthermore, it is extremely rare for an active portfolio to own anywhere close to 500 names.

(*) Owned in client and personal accounts

 

In measuring the performance of the SWX, the measurement compares the closing trade price of the prior trade date to the ending price of the current day. It is extremely common for the ending price to be higher or lower than what an investor receives, so the actual performance of an active account is likely to be different than an end price calculation.

 

The management committee of the Wall Street Journal and the Standard & Poor’s editors have decided that SWX will only contain stocks that are listed on US stock exchanges. They also do not limit the percentage size of holdings in the composite, while the SEC limits diversified mutual funds to holding no more than 5% weighting within the portfolio of any given stock at cost (not market). Non-diversified funds are not restricted this way.

 

In today’s world, managed accounts are almost certain to hold cash or fixed income instruments as redemption reserves. Additionally, opportunity reserves will in many cases include non-US listed securities.

 

Many years ago, for these reasons, we convinced a number of outside directors of mutual funds to compare the performance of their funds to similar portfolios of funds. I believe this is the way almost all investment accounts should be measured, whether they are funds or not.

 

Other Mis-labeling

Last week, three of the five leading large-cap stocks were labeled financials; JP Morgan Chase (*), Morgan Stanley(*), and American Express(*). None of the articles I read mentioned that Charles Schwab(*) was the fourth largest declining large stock on Friday. Clearly, Schwab has something else going on that the first three do not, despite sharing the same industry label.

(*) Client or personally owned

 

Also last week, there was no mention of various countries whose local market indices showed gains, Europe 6 and Asia 12.

 

Another example of incomplete labeling was a headline of Goldman predicting that “Gold will hit close to $5000, if Trump undermines the Fed”. Perhaps true, but other commodities and some foreign stocks may do just as well. (Coincidently, a strategic collaboration between Goldman and T. Rowe Price to create a range of public and private investments was also announced. As a part of this collaboration, Goldman will invest $1 billion in open market purchases of T. Rowe Price stock.  Perhaps the more important message, is that Goldman believes the market is not offing enough diversity.)

 

Question: What are your thoughts? 

 

 

 

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Mike Lipper's Blog: What We Should Have Been Watching? - Weekly Blog # 903

Mike Lipper's Blog: The Week That Wasn't - Weekly Blog # 902

Mike Lipper's Blog: DIFFERENT IMPLICATIONS: DATA VS. TEXT - Weekly Blog # 901

 

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Selective Readings of Data - Weekly Blog # 892

 

 

 

Mike Lipper’s Monday Morning Musings

 

Selective Readings of Data

 

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

                             

 

 

Assumption

I assume as a careful reader of these musing one cannot avoid the “happy talk” produced by most of the media. For balance, as a public service for my blog readers, I’ll focus on data and other information supporting the other side.

 

Long-Term

Jaime Dimon, the CEO of JP Morgan Chase, was recently quoted as follows: “If we are not the pre-eminent military and pre-eminent economy in 40 years, we will not be the reserve currency…” He is pleading with you to develop four views that he considers critical to a sound investment philosophy. They are the importance of military standing, economic position, having a forty-year view (the bulk of institutional and individual money is invested for long periods), and the significance of being the sole reserve currency.) I will be happy to discuss your views on these questions.

 

Others’ Views Focused on the Short-Term

Recently, 17 well-known investment advisors made estimates of the Standard & Poor’s 500 Index 2025 closing price. Nine estimates were higher and eight lower. The lowest was JP Morgan Chase, 13% below Friday’s close. (Of all the various stock market indices, I believe the S&P 500 Index is the best to gage the level of the market. On Friday it only gained one tenth of 1%, showing the stickiness of the movement.) Morgan Stanley is expecting the US dollar to drop 9% over the next year.

 

Unfavorable Conditions

Retail investors of all sizes are being told to invest in private investment vehicles, including private equity. These investments represent some 30% of the M&A market. History suggests the public buyers come into many trends last.

 

Currently, there are 7.5 million unfilled job openings. Employers can’t find suitable workers. I believe many potential employees lack sufficient motivation, discipline, and/or integrity for these jobs. This is leading to a low growth rate in labor productivity.

 

The employees themselves are one reason for these conditions at commercial, government, and nonprofit institutions. Due to the slow growth of our society there are pressures at all levels of management to improve labor productivity. Managers strive for efficiency, defined as output divided by input. The simple way to do that is to assign generated revenue to each worker. This is relatively easy to do for line employees, by leaving out the supervisors. The next step is to reduce the number of supervisors. This creates efficiency. However, supervisors create most of the worksite culture, which leads to product and service quality.

 

In just about every sector of modern life we are experiencing a decline in the quality of the products or services we receive. However, as a result of employers not hiring more experienced quality supervisors, this has led to customer dissatisfaction, lower customer/client loyalty, lower sales, and fewer recommendations. Employers should be hired for effectiveness, which would reduce costly mistakes and improve relationships.

 

Two World Realties

As long as we have politicians and their advocates chanting happy talk about the economy while employers cut back on hiring, we are going to experience a dichotomy in the investment world. We can hope for the best but should be prepared for the worst.

 

The Form Does Work

As many subscribers already know, I count my former time at the New York racetracks as a critical learning experience. Consequently, the running of the Belmont Stakes, which was run early Saturday evening, is very important to me. The race is now one quarter mile shorter than the traditional 1½ miles, which means its long history of winning times is no longer relevant to racing analysts (handicappers).  From a betting/investment standpoint, the job of the analyst is to evaluate the odds of a particular horse winning vs the odds posted on the tote boards. These odds are derived from the amount of money invested on each horse, including taxes and fees paid to the track. The smaller the odds, the more popular the payoff selection on the winning horse. In many ways this is similar to the most popular investments in the marketplace. It is important to remember that the most popular bets, called favorites, win a minority of the time. But they do win more often than the less popular bets.

 

The first three horses crossing the finish line at the Belmont Stakes were the same three horses finishing in that order at the Kentucky Derby. Thus, the history of these horses proves to be a good predictor. Can stock buyers count on a similar phenomenon in picking stock investments? It is occasionally possible, but not all the time.

 

If using lessons learned at the racetrack seems a bit odd, think about Ruth and I attending a New Jersey symphony concert on Sunday afternoon. This featured two great classical performers, Xian Zhang, conductor and Conrad Tao, pianist. They impressively played Sergei Rachmaninoff’s second piano concerto. This piece was a breakthrough work marking Rachmaninoff emerging from a three-year depression. The length of the depression could be a useful guide to an investment depression, unless the government lengthens the period of the depression, as FDR did in 1937.

 

Thoughts?      

 

 

 

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Recognizing Change as it Happens - Weekly Blog # 876

 

 

 

Mike Lipper’s Monday Morning Musings

 

Recognizing Change as it Happens

 

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

 

 

 

Perspective is Difficult to Read

When gazing out a window while traveling in a car or a plane the view constantly changes, while the view within the vehicle remains constant, similar to the internal changes we experience while investing. Many of us are aware of both the outer world and our own investment perspective, although we are often unaware of the changes in people next to us. Rarely do we focus on factors impacting our own thinking during our travels.

 

Now may be a good time to review what is happening to those close to us, and even more importantly to ourselves. The following list of items crossed my consciousness this week, causing me to consider changes to our investments. In no particular order:

 

1. While I am aware of the US stock market trading volume growing, the rate of change between the 2 stock markets is telling. Over the last 12 months trading volume on the NYSE has grown +8.03%, while the NASDAQ has grown +57.39%. This indicates that there are two very separate markets. This was confirmed by Thompson Reuters’*, an old Canadian/British firm, through their actions this week. They moved their US listing to the “junior” exchange, which they identified as the home of technology companies.
2. The AAII sample survey had only 28.4% of their participants being bullish for the next 6 months, while 47.3% were bearish.
3. The Economic Cycle Research Institute (ECRI) industrial price index was up +6.44% over the past 12 months.
4. The Chinese marriage rate has dropped -20.5%.
5. JP Morgan Chase* announced layoffs for next year.
6. International Mutual Funds were the best performing group this week for the first time in a long time, led by large-cap growth funds.
7. The Financial Times is asking how big Walmart* can get.
8.  Until we actually see the final legislation and/or a court ruling, one wonders how the US will be governed. The US executive branch of government is in the courts for changes they’d like to make, after legal challenges.

I wonder how much longer the four international political leaders (Putin, Xi, Trump, and Moodi) will remain in power.

(* Owned in client or personal accounts.)

 

We are at a period in history where multiple large changes are occurring somewhat simultaneously, with significant consequences for winners and losers. Time is a scarce resource and that creates a sense of urgency among the participants. The following events bear close scrutiny as the outcome will be consequential for all.

• Change in US government – The power dynamic is being challenged in Washington DC and the courts, with a clear understanding that power could revert to the old order after the mid-term elections. So, Republicans recognize that change must be accomplished within the next two years. If the Republicans are successful, the country will likely see smaller government with some power ceded to the states. Smaller government should come with smaller costs, a plus for the national debt situation.
• Global government dynamics – Many governments around the world are grappling with similar ideological dynamics as those seen in the USA and are nervous about what might come next. This was on full display at the Munich Security Conference this week. The potential for trade wars could intensify significantly.
• Two wars have the potential to conclude this year, Gaza and Ukraine. Not all are likely to be happy with the outcome. Nor will there be unanimity among those shepherding the negotiation. Rebuilding will be costly in both locations, with no clear indication of who will pay and what deals will be struck to compensate those investing the money.
• Significant technological changes are likely in the next few years, with AI, robotics, and automation at the center of these changes. There will likely be big losers and winners, where the first mover advantage could be quite significant.
• An energy renaissance is likely, as the new technology driven future requires substantially more power than what it is replacing. The green revolution will not likely provide adequate solutions for the energy shortages. Natural gas and nuclear power seem to be the likeliest winners, as they provide the most consistent baseloads and the smallest CO2 emissions.    

Each of these bullet points has the potential to be disruptive. Having them all occur at roughly the same time will make for a challenging investment environment. While traders may be able to trade successfully, the odds favoring investing are declining for the next several years.

 

I would like to hear contrary views.

 

 

 

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Mike Lipper's Blog: A Rush to the 1930s - Weekly Blog # 875

Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

Mike Lipper's Blog: Roundtable Discussion - Weekly Blog # 873

 

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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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Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

Mike Lipper's Blog: Roundtable Discussion - Weekly Blog # 873

Mike Lipper's Blog: New World Rediscovered - Weekly Blog # 872

 

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More Evidence of New Era - Weekly Blog # 874

 

Mike Lipper’s Monday Morning Musings

 

More Evidence of New Era

 

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

 

 

 

For some time, I have viewed US and global markets as having entered a “New Era” phase. As with any transition, until it is complete it is possible the trend will not finish and reverse to the old happier trend. The self-appointed job of this analytical observer is to regularly make observations as I see them.

 

The Rise of the Investment Manager

Independent custodians who are also not investment managers are losing influence with the owners of capital. I see assets leaving bank custodian/ investment managers and going primarily to investment managers who custody their own assets or contract out the custodian function. One clue is this week’s announcement that the head of JP Morgan Chase trading is joining an independent hedge fund. Insurance companies have been reducing their direct management of institutional equity assets and hiring independent equity managers.

 

At the World Economic Forum it was recently noted that the number of individual Trillionaires will shortly grow from one to five, if not more. This is more a function of concentration than growth in the market. Part of the problem is the growth of business investment being small to flat after the impact of inflation. One of my concerns is the anticipated AI flows going into various “sales channels” and making them more efficient, rather than increasing the number of units sold. One disturbing factor is the size of the global R&D budgets, excluding inflation, being relatively flat over the last five years.  

 

US Education a Particular Problem

Global growth is often the result of a better educated workforce. While the US has the largest and most expensive “educational” system in the world, it is not producing a workforce that measures up on the world stage. (The reason for the quotes around education is that in the US we have substituted education for schooling, which uses “social promotion” or teaching to pass the test rather than teaching students how to think logically.) Mike Bloomberg, the former Mayor of NYC, points out that only 67% of 8th graders scored at the basic or better reading level, the lowest level since 1962. What I find more distressing is that only 60% of 4th graders pass a basic math test. This is not going to help over half the US population in the “AI” world.

 

Investors are Worried

In the latest week of generally bullish projections 51.7% of the stocks trading on the NYSE went down, which was surpassed by the NASDAQ where 58.2% declined. The regularly published sample survey of the members of the American Association of Individual Investors (AAII) showed 41% being bullish, down from 43.4% the prior week. What may be more significant is the percentage of those being bearish rose to 34.0% from 29.4% the week earlier.

 

Walking Around Analysis

I know a number currently unemployed people of all ages with good resumes and work histories, who are having difficulty getting hiring interviews. Fewer and fewer companies are hiring. When I walk through high-end shopping malls, I find the better stores understaffed. When speaking to operating people in profit and non-profit organizations, they say they are experiencing measurable declines in operational efficiency. They point to their organizations and/or their suppliers being hollowed out by absent workers of all levels from senior management to first level people.

 

One wonders how long growth in the economy and markets can continue with a poorly educated workforce who all too frequently are absent from work. In the near future companies will have little alternative other than to use AI to compensate for this decline in productivity. The tragedy will be the millions of uneducated and unmotivated employees left on the sideline because they can’t compete. Education in America is desperately in need of a solution, hopefully a new administration claiming to be in search of excellence can deliver it.  

 

As an analyst I suspect the interim results this year will disappoint.

Please tell me if I’m wrong.

 

 

 

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Mike Lipper's Blog: New World Rediscovered - Weekly Blog # 872

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We are Never Fully Prepared - Weekly Blog # 845

 

         

 

Mike Lipper’s Monday Morning Musings

 

We are Never Fully Prepared

 

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

 

 

The Lessons of Saturday, July the 13th

One self-appointed mission of the weekly blog is to make subscribers aware of potential negatives absent from the content of various media pundits and financial sources. We are not predicting bad things happening but will offer some contrast to the regular diet of “happy talk” from most other sources. In evaluating the bulk of normal inputs, I think it is useful to consider the possibility that some things will not have happy outcomes.

 

Coming from my real educational experience at the racetrack, where the most favored horses win more often than those with longer odds. The betting returns on winning favorites are smaller than those of longer shots winning. Consequently, a sophisticated bettor will often have a smaller win vs loss record but will walk away from the track with more money by selectively picking horses with higher odds. However, betting on every non-favorite usually produces losses in aggregate.

 

To prevent such a result, one must be selective in taking high odds bets and avoid improbable long shots. Thus, I was totally unprepared for Saturday’s distressing news of an assignation attempt which caused two deaths, two wounded, and most importantly the near death of Presidential candidate Donald Trump.

 

As with many tragedies there are immediate losses and potential longer-term impacts. Luckily there was just one immediate death along with two seriously wounded casualties, as well the death of the assassin. Our hearts go out to the innocents.

 

The longer-term implications are possibly numerous and far reaching. Unfortunately, in America we have periodically had both failed and successful assignations of prominent politicians. Hopefully, we can rid our culture of these tendresses.

 

I do not know if the attempt on the President’s life will have any impact on his choice for Vice President. Furthermore, we don’t know if the American voters will change their choice for President this fall, or if it will have impacts on our foreign friends and foes.

 

The impact on me personally will be to focus on the possibilities rather than the probabilities in looking at the future.

 

Things that Could Change the future

1. The results of the weekly sample survey of the American Association of Individual Investors (AAII) are viewed by some market analysts as a contrary indicator. I find it useful in gaging the short-term views of this group of smaller investors. (The survey occurred prior to the assassination attempt on Saturday.) The change in the bullish swing over the last two weeks was almost twice as pronounced as the bearish swing, 41.7% to 49.2% (+7.5%) vs 26.1% to 21.7% (-4.4%), respectively. Perhaps more significant, the bull score was more than twice as large as the bear score (49.2% vs 21.7%). This could be the result of a difference in the makeup of the sample participants. A difference of this magnitude is an extreme condition and is unlikely to be maintained.
2. Too many investors believe the market can be understood by following the S&P 500, which is a collection of eleven industry groups that move quite differently from each other. Over the last ten calendar years the monthly low points of the eleven industry groups have rarely coincided.
3. The number-nerds have great faith in US government compiled data. In an article in the NY Times, which regularly has errors. The Times produced an article with the headline “US Economic Data Integrity May Be at Risk, a Study Finds”. The article quotes a study by the American Statistical Association proclaiming the risk of future errors increasing due to government departments and agencies being squeezed by budget issues, particularly due to the lack of funding for research. I remember this problem well. In the early 1960s I was a junior analyst assigned to tracking the steel industry. I reported to the Director of Research who came to the bank as an economist from the government. One day I went to him and suggested the steel industry data was worthless in guiding investment decisions. “How could that be, it came from the government”. I suggested the eight companies in the data file were quite different. Some had to ship their products many miles to customers while others had very little shipping costs, causing large differences. Based on this factor alone those companies were better investments, Chicago over Pittsburgh. I consequently created my own subsector groups for selection purposes.
4. The CEO of JP Morgan Chase was traveling on the day it released its quarterly earnings announcement. He usually participates and I felt his input could be more important than some short-term numbers.

 

Two Chinese Inputs Could Be Significant

1. Chinese troops are holding military exercises with Belarus on the Polish border. (I wonder whether this could be the result of Finland and Sweden joining NATO, and possibly Ukraine?
2. Later this month the Chinese are holding the 3rd Plenum, where the following topics may be discussed, with some yet to be determined:

a.  Can officials restore faith in the economy?

b.  How will officials look to forge China into a tech superpower?

c.  Do foreign companies have a future in China?

d.  How will China address growing geo-economic risks?

e.  Can officials fix the government broken revenue model?

f.  How will the Party respond to China’s demographic decline?

g.  How will China try to manage the great transition?

 

 

Are you prepared for the pace and depth of changes?       

 

 

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Mike Lipper's Blog: What I See and Perceive By Observing - Weekly Blog # 844

Mike Lipper's Blog: Preparing for a Recession - Weekly Blog # 843

Mike Lipper's Blog: Understanding the Universe May Help - Weekly Blog # 842

 

 

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Investment Markets are Fragmenting - Weekly Blog # 839

 

         

Mike Lipper’s Monday Morning Musings

 

Investment Markets are Fragmenting

Flows Going to Potentially Higher Risk

 

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

   

       

   

Why the Fragmentation?

The answer is simple, salespeople make money by getting investors to make investment choices. At the institutional level commissions have totally disappeared, and the same largely applies at the retail level too. However, “vigorish” is alive and well, just with different names for spreads, underwriting fees, and management fees. Passive clients may decide at some future point that management fees are not worth it.

 

A valuable client is one that is actively investing and directly or indirectly aiding in getting new active clients.  The value of a client occurs either through the flow of new money or the reallocation of the portfolio. The marketing agent is consequently a bit of a worrier when communicating with clients. Furthermore, there is a desire to introduce new investment ideas, particularly new types of securities or new investment markets. The marketer will often present him or herself, or their firm, as more knowledgeable than the client. Thus, the marketer can dominate the client more than they expect.

 

Performing Better with More Risk

What follows is a brief discussion of current possible ploys that might be suggested. In truth these ideas might be sound if executed when not so popular. If peers already hold positions in the new play, their length of time to the eventual peak and subsequent major decline is shorter.

 

There are a very limited number of investors who have trading skills, and that does not include me. Most successful investors hold a relatively small number of holdings for many years. These are the types of investors who own Berkshire Hathaway with the goal of transferring assets to heirs after they are gone. (I am one.)

 

Until perhaps this week, James Mackintosh a Wall Street Journal columnist, noted that “Four giant tech stocks added more market value than all other stocks in the S&P 500 for the last month.” I suspect many investors were enticed to buy those four stocks. Unfortunately for them, the only class of stocks to rise for the week ended Thursday were small caps. regardless of growth, core, or value orientation.

 

Many individual and institutional investors have portfolios consisting of stocks listed on the NYSE, usually with dividends. These investors might be enticed to invest in NASDAQ listed stocks due to the greater number of tech stocks. There is a belief that most short-term NASDAQ traders are better than those playing on the big board. In the latest week only 23% of NYSE volume fell, compared to 42% on NASDAQ.

 

The fastest growing asset class today is Private Investments, either individually or through funds. As is often the case, the biggest risk is not the issuer, but other holders. The sponsors of private debt and equity do not have an obligation to buy back securities, except at the terminal date. The secondary market is very limited, and prices favor professional dealers.

 

Jaime Dimon, CEO and Chair of JP Morgan Chase is worried about inevitable investment mistakes in the privates. Although he does not see a structural problem, I think there potentially is one for two reasons.

1. These securities are being sold to individual investors. When the public loses money, they often complain to the media and members of congress who are always pro regulation.
2. There are very few pension funds still operating. Many have promised fixed returns to government employees, which includes teachers. For years these plans have used interest rates much lower than current rates, many of which have been bought from insurance companies. I believe some insurance companies will go bankrupt if interest rates stay at current levels or go higher, with the retirement burden falling on taxpayers. Politicians are probably better at getting the feds to change regulations. A guaranteed payment funded by a variable (market) sensitive vehicle is dangerous.

 

What are Your Thoughts?

 

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Mike Lipper's Blog: The Rhyme Curse -Weekly Blog # 838

Mike Lipper's Blog: The Most Dangerous Message - Weekly Blog # 837

Mike Lipper's Blog: Trade, Invest, and/or Sell - Weekly Blog # 836

 

 

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Michael Lipper, CFA

 

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