What We Should Have Been Watching? - Weekly Blog # 903

 

 

 

Mike Lipper’s Monday Morning Musings

 

What We Should Have Been Watching?

 

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

 

 

 

Lessons from the racetrack and life

At any given time, humans tend to congregate around what is most important to them or what is going to happen. These topics are labeled favorites, both at the track and by psychologists. On any given day at the track favorites win a minority of the races. More importantly, when favorites win the payoffs are relatively small, as the winnings must be shared with a large number who have reached the same conclusion.  Thus, backing the favorite is a low return game.

 

The problem in going with the less popular is their winning ratio is lower, as most people bet on the favorites. Thus, in terms of frequency, favorite betting wins.

 

There is a more rewarding goal, winning more money over time with less frequency but higher returns. This is the choice I learned at the track and apply to investing in securities.

 

This Week as an Example

Using the public media and limited public conversation, their favorite investment topic was the speech by Fed Chair Jerome Powell at Woods Hole, the implication of which was a cut in short-term interest rates. While most investors believe these are probably the most important questions to be asked, I believe there are more important questions with higher, longer-term implications. These can be grouped under labels of concentration and valuation.

 

Concentration

Much has been written about the amount of money invested in seven or ten largely technology/financial stocks. One study shows that the ten most popular stocks in the S&P 500 represent 38% of the total value of the entire index. On average, the ten largest market caps in the index between 1880 and 2010 represented only 24%. However, I question the math or source because railroads represented 63% of the stock market in 1881.

 

This observation is of particular interest to me as a graduate of Columbia College. Around 1880 Columbia had an endowment account restricted to investment in the most secure stocks. You guessed it, lawyers restricted the investments to railroads!! This particular endowment was to be spent on bricks for the campus. Thus, for many years all of Columbia’s buildings were brick faced.

 

There were many important implications that should have been drawn from this case, especially since every single railroad went into bankruptcy years later. However, if you had included political analysis along with legal analysis it was obvious railroads had become too powerful in the country.

 

In terms of political analysis and understanding how the US works politically, people should read a new 856-page book written by Bruce Ellig, a good friend of ours. The title of the book is “What You Should Know about the 47 US Presidents”. The book devotes a chapter to each President, covering the most important laws and regulations of his term. Included in the book is information about the President’s life and personal activities.

 

Valuations

John Auters of Bloomberg believes “valuations are extreme”. Prices in terms of sales, earnings, book value, and dividends are at a stretching point. In a recent survey of intuitional managers, 91% believe the US market is overvalued and 49% believe emerging markets are undervalued. Some 60 years ago I worked for a research-director who believed shipments of boxes were a good economic indicator. They probably still are, and that is why I took notice that they were down -5% in the second quarter.

 

With the federal government pushing to let retail investors participate in private capital transactions, particularly private equity, the health of the market for these longer-term, illiquid investments, could impact the listed market. There are approximately 3100 positions in private capital firms that are unsold. Their retail owners may not see the level of distributions they were expecting, which could unfortunately increase the volume of listed securities to be sold.

 

Long-Term Horizons:

 In the long run equity investing can generate very attractive returns. A dollar invested in the 1870 equity market by the 25th of July would be worth $32,240 in nominal dollars before taxes this year.

 

 As often said, history does not repeat but often rhymes. There are a number of parallels with the market crash of August 1929 to November 1936, and the economic depression that followed from February 1937 to February 1945, which will be discussed in upcoming blogs.

 

 

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Trade, Invest, and/or Sell - Weekly Blog # 836

 

         

Mike Lipper’s Monday Morning Musings

 

Trade, Invest, and/or Sell

 

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

      

       

 

Every moment of our investment lives we accept the choice and risk of investing in equities, or alternatively accept the risk of not investing in equities. There are two valuable insights that may be helpful in reaching your investment posture.

 

The first insight rests on investment history. John Auters, a well-respected columnist now with Bloomberg wrote this week “History is clear it’s very, very dangerous to get out of stocks.” He was relying on data from Barclays using average annual returns for each component: cash, bonds, and stocks, covering the 20, 10, 5, & 1-year periods. The study showed stocks outperforming cash and bonds for each slice of investment history. This was not surprising, stock investors expected it.  What was surprising was the absence of a single 20-year period of losing money. This should provide some comfort to the two university investment committees on which I serve, as well as other long-term non-profits and those who supervise inter-generational trusts. (Due to a more strenuous history in the UK, a 23-year period will produce the same results as the US.)

 

When thinking of strategy, it would be prudent to remember the wise words of Jaime Dimon, the 20-year CEO of JP Morgan Chase, the most intensely managed global bank. He said, “We know we are going to be wrong”. (The key is recognizing the mistake and correct it.)

 

What about Bonds

We are on the verge of generating US Treasury yields of 5%+, with high quality corporates already at that level. Because of a hike in the Fed rate or some other driver, we may possibly be dealing with 2 - 30-year treasury yields reaching 5% or higher. If that were to happen it could harken back to the years when the retail market and some institutions plowed money into the “magic fives”, which attracted cash and/or redemption cash from funds, bank accounts, or the sale of equities.

 

With US Treasuries generally accepted as the safest investment vehicle, there was a rush to own them. Since 1928 there have been 19 years where yields on US Treasuries were negative. Not bad, 97 years with no defaults. (Mutual funds owning a portfolio of bonds continuously buy treasuries, so they don’t have a fixed maturity or a date certain when the holder will receive full payment of principal and interest, which the owner of the actual individual bonds does). Thus, there is low risk to the owner of bonds, which should be considered for a below equity return, with the odds suggesting a positive return.

 

Potential Worry List

There is an overabundance of favorable news from largely left media-oriented sources, with little or any balance. There is a need to identify what could go wrong. Some suggest the radio operator of the Titanic was too busy sending out congratulatory messages to receive iceberg warnings on its maiden voyage. (Is the list of worries analogous to the iceberg messages not received by the ship’s senior officers?) History suggests we could be surprised by governmental activities until the end of 2024.

• The feedback communications loop is getting weaker. Print advertisements are dropping at both the New York Times and the Wall Street Journal. One day last week the eastern edition of the Journal was reduced to one section, rather than the usual multiple sections. Major ad agencies are reporting weak advertising revenues. Much of the decline is probably a function of less advertising by the big box department stores, except by those closing branches.
• The shopping habits of lower income customers are changing, with lower priced merchandise replacing higher priced brands.
• Industrial product prices rose +1.87% last week after a period of little movement. On a year-to-date basis industrial prices have risen 3.56%. (I wonder if the long-term inflation rate will settle in the 3-4% range rather than the 2% level stated by the New Zealand central bank.)
• Some manufacturers have noted some of their customers building a stash of their supplier’s products, delaying sales by the producer. (I don’t know if this is due to past supply-chain issues and/or the customer hedging against future inflated prices. The second occurs more frequently in countries where short-term interest rates are high or not available.
• Revenue dollars are reported, what is not reported is the number of transactions. In some cases when unit growth is meaningfully below revenue, prices have likely risen, which is not likely to be a frequent event. (As an analyst trying to predict the future growth rate, I would reduce the future revenue growth rate. It is much more difficult to project the impact of future profit margin improvements. It may be wise to use a 10-year average, excluding any double-digit year.)
• The developed world needs more productive workers. April job creation in the US was the second lowest going back to at least January 2022. The US birth rate has been below the replacement rate for some time.
• Stock markets participants are sending mixed messages. Of the 32 weekly stock price indices published by S&P Dow Jones, 28 rose and 4 fell, with 3 being overseas and one domestic.
• The AAII sample survey shows 40.8% bullish and 32.1% bearish for the next 6 months. The bulls are much more volatile, their reading three weeks ago was 23.8%. Over the same period the bears declined from 35.9%.
• Transactions in the markets were also split. 35% of the volume on the NYSE fell, while 45% on the NASDAQ declined.
• In terms of the leading fund performance by sector. Though Thursday the utility sector led with +4.53%. The worst performance was generated by Indian Region funds, with a return of -2.77%.

 

Unlike the captain and crew, I am aware of risks and have a buying reserve and many holdings.

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.