Melt Up Not Convincing - Weekly Blog # 899

 

Mike Lipper’s Monday Morning Musings

 

Melt Up Not Convincing

 

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

 

 

 

Contrary Evidence Also Not Convincing

 

Low Transaction Volume, High Chatter

 

Short-Term Implications

 

1. NASDAQ is breaking up. Up volume is leading, while more prices are down than up?
2. Industrial commodity prices rose during the week, 115.8 vs 114.98 the prior week according to ECRI.
3. AAII weekly bullish outlook is declining, 36.8%, 39.3%, and 41.4% over the last 3 weeks.
4. WSJ weekly down prices seem strange. The worst was Natural Gas -12.71%, but the next worst was a -2.82% negative return. This suggests there were few negative prices. Natural Gas prices remained volatile, being up +7.57% the prior week.

 

Possible Longer-Term Implications

1. Trump used construction costs for an already constructed Federal Reserve building to raise the costs of the new headquarters. Chairman Powell spotted it. Assume for the moment this was a honest mistake, it suggests that the President’s staff is lacking something. There have been similar mistakes, some of which were part of the reason the courts ruled against various executive orders.
2. Charley Ellis’ column on David Swensen in the Financial Times listed some of the reasons for Yale’s outstanding long-term record. A long-term focus meant less liquidity was needed and analysis went beyond financial statements to management policies, and well-placed alumni which wasn’t mentioned. I tried to follow his approach.
3. Most US Presidents have focused on managing the government and society as it was when they came into office. President Trump is the fourth president to make fundamental changes. (The others were Jackson, Teddy Roosevelt, and FDR.) Along with the other activists Presidents, the current occupant of The White House wishes to proscribe new ways of thinking to change our behavior. This is what our founders feared, the tyranny of the majority over the minority. Our Constitution and Bill of Rights have built in checks and balances. Consequently, I believe we are going to see more court actions for the rest of this term.

 

Implications?

I believe it’s going to be increasingly difficult to develop a long-term investment policy as we go through a period of attempted structural change.

 

What do you think?

 

 

 

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An Uneasy Week with Long Concerns - Weekly Blog # 884

 

 

 

Mike Lipper’s Monday Morning Musings

 

An Uneasy Week with Long Concerns

 

 

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

 

                             

 

The Week that Was

Harkening back to an old London-based television program focused on the week’s changes, the following items of interest and perhaps importance crossed my computer screen:

1.  Two brief bear-market type rallies.
2. The US dollar broke par on Friday, finishing at 100.102. (Marcus Ashworth of Bloomberg believes that as much as some try to find a successful substitute, it can’t be found.)
3. Price signals – The Baltic Dry Index fell to 1274 vs 1729 a year ago; The ECRI industrial price index fell to 113.27 or -4.33% from a year ago. (This index measures the prices of industrial materials needed for production e.g. metals.)
4. Only Precious Metals and Dedicated Short mutual fund averages gained for the week ended Thursday.
5. Volatility increased in the week, with InfoTech stocks leading with gains of +9.67% while the Hang Seng Index fell -8.47%. (Normally the high/low spread is closer to high single digits than 18 percentage points.)
6. Market liquidity may be a major contributor to the market indices ranking year to date; DJIA -6.94%, S&P 500 -10.43%, and NASDAQ -15.14%.
7. Both analysts at Morgan Stanley and those contributing to Seeking Alpha Quant Ratings downgraded mid-cap investment bankers and mid-sized fund manager stocks. (Compared to their larger peers they rely almost exclusively on their brains, rather than a combination of brains and capital.)

 

Longer-Term Implications

• Howard Marks believes we have seen the best economic period in history.
• Marcus Ashworth believes we have entered the beginnings of a new phase this week.
• President Trump has told associates that he can tolerate a recession, but he is afraid of a depression.

 

Question: Do any of the elements mentioned in this blog aid or lead to a change in your thinking?

 

 

 

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Mike Lipper's Blog: Short Term Rally Expected + Long Term Odds - Weekly Blog # 883

Mike Lipper's Blog: Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

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Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

 

 

 

Mike Lipper’s Monday Morning Musings

 

Increase in Bearish News is Long-Term Bullish

 

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

 

                             

 

Another Term for History: Uneven Cyclicality

In describing the behavior of people and other animals the terms of optimism and pessimism are appropriate, particularly the extreme emotions in overcoming risks. These actions drive all kinds of markets, including climates. Extreme increases and decreases occur irregularly, with people forgetting the pain caused by collapses.

 

We may currently be entering a negative economic cycle, possibly caused by an exaggerated political cycle. The biggest danger in focusing on the probable down cycle is retreating from a continued effort to search for early up-cycle clues.

 

A lawyer who practiced at a bank during the Great Depression mentioned that he hired workers every day to work on bad loans. During this period there were some activist investors who purchased defaulted securities, hoping to hold them for a partial or full recovery of face value. Some of the more well-known players were Ruth Axe, Max Heine, Ben Graham, and David Dodd, among others. Current conditions are not yet at this level of pain, but some smart people are examining the potential for such a period, both in the U.S. and elsewhere.

 

What is Happening Now?

Moody’s (*), in its latest proxy statement, predicted a continued multi-year decline. PIMCO is reluctant to buy long-term US Treasuries. Small and Mid-Cap stocks are dropping more than large-cap stocks on down market days because there is only liquidity in large-cap trades. This suggests that sizeable positions may have to be held until there is a sustained recovery.

(*) Owned in client and personal accounts

 

The two major consumer confidence surveys showed sharp drops in their March reports. One long-term negative factor facing the US is the relative unproductiveness of the entire educational process for investment capital. In the public school system, the number of administrators has increased eleven times the rate of growth in the number of students. (Sitting on a number University boards I have seen the same tendency at their level.) The mental health needs of the students have almost become a sub-industry. Many homes are not effective educational sites either.

 

What are the Investments Prospects?

As someone who basically learned analysis at the New York racetracks, I turn to the availability of numbers and ratios. Most dollars invested in equities are for funding needs beyond ten years. Consequently, I am using the median investment performance of the larger peer groups of mutual funds for the last ten years, as shown below:

    Large-Caps      8.50%

    Multi-Caps      7.92%  

    Mid-Caps        7.57%     

    Small Caps      6.82% 

    International   5.19%

(I think the overall range of 8.50% - 5.19% is a reasonable compound return for the next 10 years, considering the two years of 20% or more in the last 10 years. However, I don’t think the rank order of the peer groups will work out the same as it has in the past. Large-Cap performance is too heavily dependent on a concentrated group of high-tech companies. Small and mid-caps should benefit from buyouts and the movement of talent from larger companies to smaller companies. International funds may be the beneficiary of reactions to US government actions. I recently added Exor, the Agnelli family holding company, to my personal portfolio.

 

With so many controversial views expressed, I am interested in learning your view.

 

 

 

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Mike Lipper's Blog: Odds Favor A Recession Followed Up by the Market - Weekly Blog # 881

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Melt-Up, Leaks, & Echoes of 1907 - Weekly Blog # 858

 

Mike Lipper’s Monday Morning Musings

 

Melt-Up, Leaks, & Echoes of 1907

 

 

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

 

 

 

A sportscaster’s view of the US stock market is that many prices are gradually rising in a “melt-up”. But the owners of the teams, when possible, are curtailing spending. Some of the fans’ happy talk appears to be leaking away, particularly as the return on the value of their assets decline. Those who think only in terms of numbers, particularly streaks, should be worried. For the first time in 40 years the Vanderbilt football team beat Alabama!!! (This highlights the difference between a statistician and an analyst. A numbers hound believes the past is always prolog to the future, whereas a good analyst scans present conditions to determine the odds of a streak being disrupted. It is never zero.) Because of evolutionary changes in laws and technology the past should be viewed in terms of modern times. On the contrary, human behavior rarely changes under similar conditions, although it may impact the odds.

 

Something About the Name of Morgan and Financial Crisis

After a long period of financial expansion and the creation of new financial institutions, it was trust-companies, not banks that were in danger of failing after experiencing difficulty collecting on their loans. (The modern analogy could be private capital funds.) Trust-companies borrowed from banks and were publicly traded, but by 1907 there were concerns that a number were insolvent and would fail. JP Morgan, the man, was concerned and called a meeting of leading bankers to meet him in his library, which he locked until the bankers promised to contribute sufficient capital to rescue one large trust-company. By so doing, he single-handedly stopped the “Money Panic” of 1907.

 

While politicians in Washington were grateful, they felt Morgan had too much power. Consequently, a few years later they created the Federal Reserve Bank, which had supervisory power over large banks. This was The Fed’s initial mission and today it is really their first mission.

 

Jaime Dimon is the current CEO of JP Morgan Chase*, the largest US bank in terms of assets. JP Morgan Chase is the unofficial leader of the banking industry, so it goes without saying they see a parallel to the 1907 crisis. He is pleading for a modern solution that allows small banks to merge without time-consuming government regulation. *We are a small owner of shares in JP Morgan Chase and use the Private-Bank facilities.

 

Other Concerns

• Our European military allies in support of Ukraine and future wars are worried. There are concerns regarding the production of ammunition and other armaments, particularly during the present decline in our productivity. The rise of union workers will additionally shrink the corporate profits used to invest in research and expansion.
• The changing business structure of the investment market. There are concerns that stock exchanges around the world now earn a decreasing minority of their earnings from their initial business of trading and clearing securities. There are fewer brokerage firms, less daily liquidity, and more direct transactions.
• Brief news releases, repeated frequently, leads to a simplistic understanding of the economy, investments, and politics. For example, most news briefs focus mostly on movements in the New York Stock Exchange. However, there are numerous trading days where NYSE issues move in one direction and NASDAQ issues move in the other. The daily movement in the Dow Jones Industrial Average (DJIA) is much more volatile than the NASDAQ Composite. (Could it be that Washington has limited capacity to understand the difference between light-volume moves and high-volume moves?) On an average day the NASDAQ trades about five times the volume of the NYSE. (Part of this spread is the amount of trading between dealers to even-up their positions.) The Year over Year volume for the Big Board is down -11.26 %, whereas NASDAQ volume is up +26.27%. From an analysis vantage point, we see major differences between the two markets. On Friday, the percentage of new lows on the NYSE was 2.4% of issues traded vs 7.2% on the so-called junior exchange. (Is the NASDAQ showing it is closer to a peak after doing so much better for the year?)

 

Question: What are you concerned about?         

 

 

 

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Implications from 2 different markets - Weekly Blog # 854

 

Mike Lipper’s Monday Morning Musings

 

Implications from 2 different markets

 

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

 

 

 

On balance the New York Stock Exchange (NYSE) and NASDAQ stocks serve very different investors, as they have different outlooks and current performances. The “Big Board” stocks tend to be older, larger capitalization, have greater media exposure and get more attention from Washington. They are likely to populate brokerage accounts managed or influenced by former commission generators who have since converted to being fee paid advisors. The NYSE also services institutional accounts with substantial capital with limited research and trading professionals, which generally appeals to older clients.

 

Those in Washington and “news” rooms may not be aware that the NASDAQ is home to 4627 stocks vs 2903 for the NYSE, as of this week. In recent years the NASDAQ composite has materially outperformed the NYSE stocks, often identified as the 30 stocks in the Dow Jones Industrial Average (DJIA).

 

NASDAQ stocks are often more volatile than those traded on the NYSE, because they are smaller and have fewer liquidity providers. This may be the reason why those without trading experience shy away, resulting in more block trades and 3-5 times more NASDAQ volume.

 

Many people confuse the NASDAQ with its Over The Counter (OTC) origin. The NASDAQ is a regulated stock exchange, distinct from the OTC market which is held together by the pink and yellow sheets publishing the competing bid and asked spreads of competing dealers. Since its earlier days, important constituents of the NASDAQ have consisted of local companies, medium size banks, and some foreign stocks.

 

While the NYSE focused on its regulatory responsibilities, the NASDAQ grew through an extensive marketing effort. This marketing effort happened at a time when a large number of what we now call “Tech Companies” were looking to find a trading home. These tech companies joined the NASDAQ exchange, attracting younger, more aggressive, professional investors and traders.

 

Implications

Trying to determine the future is impossible, but military intelligence (an oxymoronic term) attempts to do this by gathering separate elements of information to see if they provide a pathway to one of many futures. This is the approach I take in thinking about the future. While most pundits focus on present price relations, I don’t find them particularly useful. We need to guess what future prices will be for specific future periods.

 

In the short run the following inputs may be relevant:

1. This week’s high/low prices were 548/168 for the NYSE vs 411/393 for the NASDAQ (Enthusiasm/Caution)
2. Friday’s percentage of advances were 85% for the NYSE vs 68% for the NASDAQ (Winners are less happy)
3. The weekly AAII bearish sentiment increased to 31% from 25% the prior week.
4. Financial Services shorts as a percentage of float saw Franklin Resources* at 8.5%, FactSet at 6.0%, T. Rowe Price* at 4.6%, Raymond James* at 4.2%, Regional Financial at 4.1%, and the sector at 1.9%. (*held in personal accounts, unhappy          near-term)
5. Ruth’s indicator, the size of the Vogue September issue, is the biggest month for high fashion advertising, perhaps like the lipstick indicator. (The closing of Western shops in China is further proof of the expected global recession, or worse.)

 

Longer-Term Indicators

1. The White House is preparing to introduce a Corporate Alternative Minimum Tax (CAMT) of 15%, which is unlikely to pass the next Congress.
2. Both Presidential candidates are pro inflation in action, if not in words.
3. A front-page WSJ article titled “As Berkshire Hathaway* Rallies, Its Looking Too Rich to Some”, is an example of poor research. Warren Buffett has repeatably stated that he is not running the company for the present shareholders, but for their heirs, which is far beyond his 93 years. To my mind, the GAAP published numbers are misleading considering the SEC’s regulations. The value of a stock is an elusive intrinsic number. The most difficult part is the private value or current price of the 60 odd companies Berkshire owns, which are carried at purchase price plus dividends paid to Berkshire. To the right buyer, the aggregate eventual price for these companies is worth a multiple of their carrying value. (“Intrinsic Value” was a concept that I learned from Professor David Dodd, who authored “Security Analysis” with Ben Graham. This is probably the reason I and some of my accounts own the stock. We own the stock for its eventual value to our family.)
4. The world is in stages of a slowdown or a recession, with both the US and China suffering. Always treating China as an adversary inhibits our access to the Chinese market and their skills, preventing us from reaching our potential. (I don’t have a suggestion on how to conduct this rescue effort. It is like training a dangerous animal).                                                                                                                                         

 

Conclusions:

There will always be bear markets, which often precede recessions and infrequent depressions. Since we haven’t had a recession in a long time, one is likely coming. Particularly considering the political class’s stock optioned business management and the gift of a highly valued dollar compared to other deficit currencies.

 

The key question at the moment is when we will see the next INCREASE in INTEREST RATES and INCOME TAX RATES, which the Fed will follow.

 

Key Question: What is Your Bet as to When?

 

 

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Understand Numbers Before Using - Weekly Blog # 851

 

Mike Lipper’s Monday Morning Musings

 

Understand Numbers Before Using

 

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

 

The most common mistake made by investors is too brief an introduction to the investment and economic numbers used by most who chatter about “the Market” or the “Economy”. For example, the three most quoted US stock market indices are the Dow Jones Industrial Average, the Standard & Poor’s 500, and the NASDAQ Composite. Each of these unique indices was created for a specific purpose and was designed for a specific audience. However, they are now used for numerous purposes worldwide, including New York, Chicago, Washington, London, Tokyo, and Shanghai. The biggest mistake is assuming the indices are identical. Although the indices all have short comings, proper use of the numbers can lead to useful insights in making decisions.

“The Dow”
The most well-known of all market indices is the “Dow” (DJIA), although it was not the first indicator from the Dow Jones newsletter writers. They originally tracked the performance of trunk line railroads as the most important stocks in the 18th Century. Later, due to the industrialization of America, they created an index of a small number of large industrial company stocks. The main readers of their newsletter were retail brokers. At that time, it was believed that the higher the price of shares the higher the quality, making them more valuable. This led the DJIA to be weighted by the prices of the shares. As is often the case, there was unanticipated demand for the results achieved by the index. Consequently, they took advantage of the wire systems of both the large “wire houses” and the press in developing a national and international market for the index. (The equivalent of the Rothschild’s carry pigeons.) Most local papers, and later radio/television, quoted the close of the NYSE market by using the “Dow”.  Thus, across the US many more people than owned shares were exposed to the index.

The Washington Applications
Political people in Washington started following the index as a measure of the economy. They used it as a gauge of what local voters thought about the economy. The Fed’s Open Market Committee consisted of a rotation of the presidents of the local Federal Reserve Banks, whose districts were roughly tied to the size of the financial assets the local reserve banks supervised. The boards of directors of these local reserve banks all have financial leaders familiar with the DJIA. Thus, the index became an unofficial factor in bank regulation.  Fed PhDs, recognizing the limits of a 30-stock index in producing many economic studies, used NYSE data to supplement the DJIA. (This thinking led to the recognition that other indices would be needed.)

Standard & Poor’s 500
Historically, the index that next came into use was the S&P 500, which was primarily used by institutional investors. This index was designed to correct the acknowledged problems of the DJIA. First, it had roughly 500 stocks. Second, it used the market capitalization of the issuer’s common stock for weighting purposes. Standard & Poor’s is a premier bond rating organization which also covers equities. The company had an extensive menu of data points that it used to assign credit ratings on stocks, which it also applied to the S&P 500 Index. Thus, we can now compare the price of various indices relative to their book values. The S&P 500 Index trades at 5.09 times book value vs 4.08 times for the DJIA. This comparison highlights the S&P 500 index’s investment in companies perceived to possess more growth than those in the DJIA.

In my work in analyzing large-cap mutual funds, which have many more assets than other slices of the mutual fund pie, I use the SPX as the first comparator before more narrowly using growth, value, and core breakouts. I similarly do the same for most global funds. Unfortunately, I can’t find enough data rich breakouts in many local markets, indicating these funds are primarily looking for local shareholders.

NASDAQ Composite
This 3rd index does not have a size bias. The index is comprised of bank stocks, local companies, and companies located in various geographic locations, including Canada, Israel, China, and numerous other countries. Additionally, it is the initial home for companies recently gone public. Consequently, many of the stocks on the NASDAQ have limited liquidity due to the low number of shares offered and/or the founders retaining a significant portion of the stock. It is not unusual to see 4 or 5 times the number of shares traded on the NASDAQ compared to the “Big Board”.  

The “Market” is Changing
Volume is more sensitive to speculative opportunities than highly rated investments and it is amplified by the use of derivatives, ETFs, off-market transactions, and less capital present on the floor. Dow Jones S&P Global is now the owner and provider of both the DJIA and the S&P 500. Even though there have been changes, there are still missing elements in market tools.

The separation between stock and commodity markets does not make it easy to provide a fuller solution to evaluate a uniform portfolio of assets and their risk modifications in a 24-hour, seven-day world. Agricultural products, impacted by weather, are important to food manufacturing and distribution industries. Many, if not most business cycles, are impacted by agricultural disruptions, real or feared. One of the causes of the great Depression was farm belt problems caused by excessive debt creation and poor climate conditions. These led to the passage of the Smoot-Hawley tariff and its global ramifications.

(While agricultural products as a percent of population is much smaller today than in the 1920s, the global impact may be the same order of magnitude.)

Moving on to the hard commodities, the timely completion of new mines and transportation systems can be disruptive to many areas, including stock markets.

For every global consumer, global producer, shareholder, and military person, the fluctuating value of major currencies is a cause of concern. This summer the US dollar dropped from $106.4 to $100.7. (This is likely to have an impact on inflation)

A Working Conclusion
Indices are a useful snapshot, but what is needed is a continuous motion picture and an understanding of what is causing the change, including built in construction biases and an identification of what is missing. If you have any thoughts, please share them.

 

 

 

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Understanding the Universe May Help - Weekly Blog # 842

                   

 

Mike Lipper’s Monday Morning Musings

 

Understanding the Universe May Help

 

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

 

 

 

How can High Growth Stocks Co-Habitat with Flat Value stocks? 

Well-known commentators have recognized that stocks with radically different investments attractions can co-habitat without the more enthusiastic followers driving out less ebullient investors. Although from time-to-time the dominant species kill off weaker ones. 

 

As is often the case, earth bound investors have too limited a view. My exposure to the Jet Propulsion Laboratory managed by Caltech suggests a broader view, including other planets and similar elements. So far, we have not found any planetary bodies possessing a similar atmosphere to earth, so war between them seems unlikely. 

 

This suggests to me that growth and value can co-exist. The high price to earnings for extreme growth is neither a threat nor an inducement to own single digit p/e stocks. Extreme growth “planets” will move to their own rhythm and will not usually be impacted by value-oriented bodies, despite attempts at colonization.  

 

To show the difference we can look at the current year-to-date investment performance of two funds managed by Vanguard.  Their S&P 500 index fund has gained +15.51% this year, while their Total Bond II Institutional fund has fallen -0.20% for the same period. The S&P 500 has fellow travelers like the NASDAQ Composite, with a +18.65% return. The performance gap between the S&P 500 and the NASDAQ may be closing. This past week saw stocks on “The “Big Board” decline 44% vs 53% for the NASDAQ. 

 

Trading liquidity could be a contributor, with small and mid-cap stocks dropping for the past 13 weeks. Another factor could be the lack of dividends.  The 30 stocks in the Dow Jones Industrial Average (DJIA) have 3 non-dividend payers, or 10%. There are twice as many non-dividend payers in the Dow Jones Transportation Index, with one-third less positions, representing 30%. 

 

Market Structures are Changing   

Large Multi-Product/Service Financial firms have reacted to the slowdown in their revenue growth by forcing their various product/services silos to work to expand the firms’ sales base. Their model is similar to department stores which are closing or becoming depots for orders placed online. Another issue is good department store salespeople believing the customers are theirs, not the stores.

 

One attraction for sales teams leaving “wire houses” is Raymond James’* belief that customers belong to the brokers, not to their firms. They offer three alternative ways to join Raymond James. I believe there is a natural peak of good customers for every trade, after which new efforts will lead to lower margins.

 (*) Designates a position either owned by customers and/or personal accounts.  

 

An example of a smart move is Morningstar’s sale of their TAMP business, which recognizes that the number of fund distribution points is shrinking. 

 

T. Rowe Price stated in their mid-year outlook that the risk of recession is now lower. That is possible, but history suggests the higher securities prices go for a narrow segment of the general market, the more risks rise. 

 

Other Brief Comments and Observations 

The US and China agree that they prefer seniors stay in the countryside rather than come into the cities. They also both want more babies produced. The rich country replacement rate is currently 1.5% vs. a neutral rate of 2.1%.  

 

In a period where national productivity is low, the idea of creating holidays like Juneteenth and Labor Day looks politically motivated. Each day of lower productivity increases the risk that lower income jobs will be replaced by machines that can work 24/7, 365 days a year. 

 

Institutional investment sentiment was lower in June than May and April. Currently, 53% of the surveyed institutions believe a recession is not expected for the next 18 months. (I suspect there is a bias at work in their projections. Many, if not most of the respondents are primarily employees rather than owners of their businesses.) 

 

The big four accounting firms are laying people off. 

 

There is a somewhat useful Walmart Recession index of future risk, which increases when store sales are higher than the movement of their stock price.      

 

The standing military in Russia, Ukraine, and China are finding that they are not properly equipped to accomplish their mission. They point to corruption as the cause. (I suggest corruption is something of global problem. Perhaps Dr Spock or his replacement can solve the issue during an intergalactic conflict.) 

 

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Change Expected - Weekly Blog # 806

 

Mike Lipper’s Monday Morning Musings

Change Expected

 

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

 

 

 

Unusual Items

• !200 CEOs give up their positions.
• Disappointing sales for LVMH among most of their 75 labels. High-end retail sales below expected results in almost all geographies, the most damaging being China and the US.
• Average ACT scores in the US are the lowest in 30 years, with Math scores of 19.5 out of a possible 36.
• Expect liquidity pool to shrink as consumers use up government cash. Will likely lead to market volatility.
• NASDAQ declines for the week, with 61% of prices down versus 50% for the NYSE. The NASDAQ has been the performance leader for some time.
• China is producing 49% of global shipbuilding and has 68% of ship orders. Some are high value and some high tech.

 

Most Logical Changes Expected

For some time, the mutual fund performance rank order has not varied much. Using the latest week through Wednesday and 5-year performance. Ranked by 5-year performance:

                    ---Performance---

                    Latest

                     Week      5-Year

Large-Cap Growth    +2.75%    +11.67%

Multi-Cap Growth    +2.40%     +9.19%

Medium-Cap Growth   +1.52%     +7.30%

Small-Cap Growth    +0.15%     +5.11%

 

International       +2.28%     +3.57%

Global              +2.00%     +2.62%                                                                                                                                                                                            

Point of View

Believing that we live in an irregular, cyclical world, I expect the domestic rank order to be reversed in some future market period. One reason is the current effort of the FTC to reduce M&A activity of large companies acquiring smaller companies in horizontal deals, which I expect to fail. I anticipate an increase in M&A activity in the financial services sector, which includes banks, fund management companies, investment advisers, and fintech operations. Highly effective salespeople will be greatly valued, as will critical tech people. There will be cross-border and cross-industry mergers.

                  

 

 

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Mike Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805

Mike Lipper's Blog: Prepare to be Bullish, Long-Term - Weekly Blog # 804

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

 

 

 

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Head Fake, Unrecognized Opportunity, or a Minsky Moment - Weekly Blog # 788

 

Mike Lipper’s Monday Morning Musings

Head Fake, Unrecognized Opportunity,

 or a Minsky Moment

 

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

  

 

 

Searching For Direction

Because low US stock market transaction volume immediately followed the attainment of a new bull market milestone, the media proclaimed we had entered a so called new “bull market”. I wonder if it is true. I believe it is either a head fake, an unrecognized opportunity, or a Minsky moment.

 

Those of us who have watched or played competitive sports are familiar with a team’s attempt to mis-direct the opposition by using a well-timed head fake to draw the opposition into a perilous position, leaving them out of position to defend against a scoring opportunity. The media proclaimed we entered a new bull market following the S&P 500 exceeding a former high point. The transaction volume since then has been quite low. More to the point from my perspective, the NASDAQ Composite is still 17.6% short of its November 19^th, 2021 peak. The reason this is significant is that for some time the tech laden NASDAQ Composite Index has been the leading performance index.

 

Another interpretation is that it could be an unrecognized switch in performance leadership to the S&P 500. Supporting this view is the proportion of declining stocks vs total stocks traded being considerably lower than it was last week for the NYSE (1.9%) vs the NASDAQ’s (4.6%). Byron Wien is reported to have pointed out that it took 3 years to recognize the market hitting bottom in 1982. There is a similar slow recognition that we have entered a new bull market with a new leadership, which might include financials, transportation, energy, and materials. This could be the reason one of the stocks I own and hold in managed accounts (Berkshire Hathaway) was the leading dollar volume stock traded this week. It is an owner of these kinds of companies.

 

There is a third possibility, the entering of a so-called Minsky moment of a dramatic change. In looking at the movements of the market I look to the expertise of the management of mutual funds. In so doing I look at the data from my old firm, now marching under the banner of the London Stock Exchange Group. In its weekly data through Thursday night, I noted a statistical relationship. In a number of peer-groups the asset weighted performance was materially better than the median performance in the peer groups shown below:

 

        Average 2023 Performance through 6/8/23

Peer Group            Asset Weighted             Median

Large-Cap Growth           13.61%                10.28%

Growth                     14.54%                10.36%

Global                      8.47%                 6.52%

 

There are probably two reasons for the consistent gap between the weighted and median performance. The first is the substantial holding of at least 6 of the 10 biggest stocks in the larger funds in the peer groups. Second, the absence of floor specialists and trading capital on major trading desks has impacted liquidity.

 

If we are entering a Minsky moment it is conceivable that leadership could change dramatically from large to smaller market capitalization stocks. Just this week the leading mainstream peer group was Small-Cap Value, which on average was up +7.31% compared to +3.23% for all stock funds.

 

Other Considerations

1.  One of my worries about the current period is that the gains have tended to be small. The problem with small gains is that errors or other problems can wipe them out unexpectedly. During the first quarter the S&P 500 essentially broke even. More frightening is that analyst project a decline of -5.4% in the 2^nd quarter. They expect a 3^rd quarter a recovery of +1.7%, with a +9.0% gain in the 4^th quarter. Considering the number of errors reported in many sectors and companies, I fear these mistakes may wipe out many of these numbers.

 

In the past many of these mistakes would have been caught by supervisors. Unfortunately, many supervisors have voluntarily left or have been pressured to leave. Some misguided managements see the lower compensation paid to younger workers as improving margins. However, the higher margins don’t consider the inexperience of the new workers. Some managements prefer inexperienced workers who do not bring up delaying cautions. (We see this on some trading desks.) While employees who switch jobs often get twice their normal compensation raises, these pay increases are now declining at twice the rate of the increase paid for workers to stay.

                                                                                             

2.  Regardless of whether an investor owns a Chinese stock, he/she is impacted by the second largest global economy as a consumer of low-priced imports from China or as an employee of an exporter to China. To the extent the US restricts its dealings with China for political reasons, other countries may choose not to.

 

We invest globally, both in terms of making money for our accounts and also to hedge some of our domestic investments by owning some Chinese stocks competing against China. At this point in time, I believe every American should follow activities in China.

 

Headlines from China

1. The substantial unemployment in the 16-24 age group. I suspect many of them are better educated and disciplined than our own youths who don’t have similar attributes.
2. Second and related is the expressed view of the Chinese equivalent of our Secretary of Defense who said that a war with the US would be disastrous for them. This removes the European approach to people out of work.

3.  People at the top of the US financial ladder have some of the best investment and tax advice money can buy. I find it instructive that the top 0.1% have substantial amounts invested in haven partnerships and individual haven securities. The next 10% have very little in haven partnerships, but a lot in individual haven companies. I suspect those at the very top are concerned about preserving their wealth for others. While they fear inflation, they are more concerned about taxes. Perhaps we should be thinking long-term?

 

 

 

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

Mike Lipper's Blog: The Course to Explain Last Week - Weekly Blog # 787

Mike Lipper's Blog: TOO MANY HISTORIC LESSONS - Weekly Blog # 786

Mike Lipper's Blog: Statistics vs. Influences-Analysts vs. AI - Weekly Blog # 785

 

 

 

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Michael Lipper, CFA

 

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Contact author for limited redistribution permission.