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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A Contrarian Starting to Worry - Weekly Blog # 886

 

 

Mike Lipper’s Monday Morning Musings

 

A Contrarian Starting to Worry

 

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

 

                             

 

Misleading Financial Statements

First quarter earnings reports, led by financials, are generally positive. Good news if maintained often leads to rising stock prices, which is not what at least one contrarian is expecting. Nevertheless, comments and actions by decision makers at various levels highlighted those worries in April.

• In the wealth management industry, one is seeing an increase in smart firms selling out at good prices. These firms are being paid by companies who believe they need to bulk up rather than do what they do best.
• Some endowments and retirement plans are shifting to less aggressive investments or passive strategies, suggesting the intermediate future appears riskier.
• Buyers of industrial goods or materials are paying less than they were a year ago. The ECRI price index is down 8.08% over the last year.
• Active individual investors, or their managers, are predicting a worsening picture in the next six months. The American Association of Individual Investors (AAII) sample survey’s latest reading shows the bulls at 21.9% compared to 25.4% a week earlier.
• In April, 48% of businesses announced reduced profit expectations, compared with 33% in March. More concerning, 41% lowered their hiring expectations, versus 29% the month before.
• Fewer Americans are planning to take vacations this year. Those planning to take one are using their credit cards less, said American Express and Capital One.

We may get some useful commentary next weekend from the new Berkshire Hathaway Saturday annual shareholders meeting format. The somewhat shorter Berkshire meeting with different speakers maybe cause a day’s delay in sending out the weekly blog.

Since the middle of the last century, we have seen a growing concentration of investment firms and banks. In the first quarter of this year, Goldman Sachs, JP Morgan, Morgan Stanley, and Citi were involved with 94% of global mergers & acquisitions (M&A). With more structural changes likely to be caused by modifications in trade, tariffs, taxes, and currencies, the odds favor continued concentration. This concentration may well lead to increased volatility and a reduced number of competent financial personnel throughout the global economy. This is unlikely to make investing easier for some of us.

 

Question: Can you show us a bullish point of view where we can invest for future generations?      

 

 

 

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News & Reactions - Weekly Blog # 833

 

         

Mike Lipper’s Monday Morning Musings

 

News & Reactions

 

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

   

       

 

Current Picture

For most purposes, the single best measure of the US stock market is the Standard & Poor’s 500 Index. After four weeks of decline, year-to-date through Friday the SPX has retreated 5.94% from its high, although it is still up 5.46% from its low year-to-date. So far, it has given back more than half of its gains for 2024. For the same period the Dow Jones Industrial Average (DJIA) has 15 stocks rising and 15 falling. Probably more significantly, only 6 of 20 Dow Jones Transportation Index stocks have risen. Even more significant, only a single market index rose out of the 32 domestic and international stock market indices that S&P Dow Jones tracks weekly. Expanding the universe to include commodities, currencies, and index funds, only 26% rose this week.

 

For those who wish secondary inputs, the following facts may be of interest:

1. The bullish portion of the weekly AAII sample survey is at 38.3%. A few weeks ago, it briefly reached over 50%. (Market analysts have labeled the AAII readings a contrarian indicator, believing the index represents retail investors who are always wrong.) That is not true! While retail investors are often believed to be wrong at turning points or late to a change, they have a reasonably good long-term performance record. In this case the over 50% reading was achieved in a quick run up, which subsequently dropped to its current 38% reading. This is not far from the mathematical neutral of 33% for each of the three sub-indices. On a long-term basis they may well be correct.
2. The only large geographic region showing growth in the number of listed companies is Asia. Thus, it is somewhat surprising that both Morgan Stanley and HSBC are laying off Asian investment bankers. These are smart people.
3. Residential insurance is absent from the normal inflation calculation. While it is of no significance for renters who have seen no important increase since 2018. Homeowners over the same period have seen their insurance costs go up over 50%. (I wonder how many other omissions there are in government data,)
4. Almost all attention in the forthcoming election has been focused on the top of the ticket. To me this is unwise. Whichever candidate sits in the White House in January will be a lame duck. This President cannot help members of Congress get re-elected in 2026, 2028, and 2030. There is a reasonable chance many voters will not vote this year due to the presidential candidates. To the extent this is the case, the missing voters will come from the center of their respective parties. This will allow the fringe elements in both parties to get more power to shape congressional committees.

 

China Impacts & Questions

Whether the US likes it or not, China is becoming the nation that will impact world trade and growth. In the first quarter of 2024 China’s GDP grew 5.3%, while US GDP grew 4.6%. Something curious happened with some of the Chinese numbers. Industrial production gained +6.1% while prices fell -2.7%. We know that China is selling scrap copper and other strategic products to Russia. (This should cast some doubt on Chinese statistics and their meaning.)

 

Long-Term Considerations

The Managing Director of the International Monetary Fund (IMF) is concerned that growth in the twenty's decade will be “tepid “. Jaime Dimon, CEO of JP Morgan Chase (*), has questioned the general belief that petroleum usage will peak in 2030.

(*) A position held in personal accounts.

 

The standard M&A game is getting more imaginative, at least in the mutual fund management company arena. Amundi, the French investment manager, is selling its American fund assets to Victory Capital for a minority interest in Victory Capital. What made this deal attractive to both participants is that each gained access to the others distribution functions in their home markets, negating the need to build an independent administrative base.

 

The Managing Director of the IMF is concerned about global growth, referring to this decade as the “tepid twenties”. Her concern about growth is partially based on the low level of productivity in much of the world. I share her view, particularly focusing on the US. If you break apart the productivity gain between financial and labor, I suspect labor’s contribution would be quite low. My guess is excessive regulation and less than useful education is holding us back.

 

A recent study shows that interest in the current election is probably at a low point for youths, with only 32% of eligible youths showing any interest in the election. In 2020 it was 56% and 2008 it was 67%. Within two generations these non-voters will be in control, which happens to be when current retirement capital will be feeding some of the current beneficiaries. GOOD LUCK TO ALL.

 

Any Thoughts?

 

 

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3 Senior Lessons + Upsetting Parallel - Weekly Blog # 813

 

Mike Lipper’s Monday Morning Musings

 

3 Senior Lessons + Upsetting Parallel

 

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

 3 Seniors Passed This Week

In age order Henry Kissinger, Charlie Munger, and Sandra Day O’Connor died this week. They were remarkable people who lived good lives, leaving numerous good lessons for life. In general, these lessons can be utilized in our quest for investment wisdom.

 

Henry Kissinger was not only a fountain of geo-political knowledge, he was also a skilled conflict negotiator. Almost every important investment contract could use his skills in finding areas of agreement and more clearly defining the goals of both parties. In many instances these agreements went beyond the headline numbers. This is the essence of a happy deal and trade.

 

Charlie Munger, who I have had the pleasure of knowing for over ten years, was a believer in staying within his circle of competence. However, he grew this circle when he could. He was intelligently patient if progress was occurring. He believed in the value of people over historic financial results, both as customers and workers. (This became important as the country transitioned to a service economy, even for the manufacturing companies. Tesla is much more service oriented than the Big 3, with their own wholly owned dealers doing some replacement work, but very little repairs)

 

Sandra Day O’Connor believed in updating decision alternatives in reaching conclusions. (One of the traditional investment problems is, what is cheap and what is expensive? For investors this requires viewing prices in terms of interest rates, the value of the dollar and other currencies, and evaluating capacity utilization, among other variables.)

 

Upsetting Parallel

Current experience is the critical investment difference between the enthusiasm of youth and inexperience. Young and inexperienced investors treat every event as something new, requiring a new way of dealing with it.  

 

More experienced investors recognize elements that are similar to past behavior patterns. This suggests that very little is totally new, most circumstances are somewhat similar to what occurred in past cycles. Kissinger, Munger, and O’Connor were young in the period leading to the “Depression”. Those of a similar age are dying out or no longer have views that seem relevant. We have not gone through a similar period since WWII, which in part was caused by the Depression.

 

Our educational institutions do not study this period and consequently most people know little about it. Unfortunately, political leaders of today also know little about it. The current occupant of the White House waxed poetic about the FDR period upon entering the Presidency, not recognizing that many of FDR’s ideas led to lengthening the Depression, and probably to WWII as well.

 

Cycles are never absolutely the same, but close enough to raise the possibility, if not the probability, of similar results reoccurring. I will attempt to identify some similar events reoccurring today.

 

Global Economic Growth Slowing Brings Autocrats to Power

World trade has slowed, and populations don’t like it. They look for someone to blame and politicians are only too eager to provide answers, gathering more power for themselves in the process. Prior growth has attracted more immigrants, initially welcomed as low-cost labor. However, their growth in numbers has now become a burden to the existing society.

 

Rising levels of crime will bring more policing power and stronger governments. We are seeing leadership in just about every continent move from the center to extremes on either the right or the left. Pay particular attention to Europe, Africa, the Middle East, South Asia, Latin America, and some elements within the US and Canada.

 

China Changes and the World Feels it

The rate of China providing goods at low prices to meet demand in the US and Europe has slowed. The Chinese have cut back on imports, so China’s net contribution to world trade has declined. Wealthy Chinese had been previously exporting as much of their prodigious savings as possible. This has led to a change in the Chinese government’s attitude. They are now trying to attract foreign investment and are changing a number their rules.

 

The Chinese are simultaneously pouring resources into their defense sector. They have more ships than the US Navy and now have 3 aircraft carriers. They also appear to have state-of-the-art missiles and spacecraft. Like other countries with large standing militaries, they have little respect for current US government forces. However, like both Japan and Germany in the 1930s, they are very conscious of the potential power the US could deploy if it had time to do so.

 

Politicians Using Old Strategies in a Changing World

Good prices vs votes/contributions are the key battles. People want goods and services without regard to where and how prices are generated, as long as they appear reasonable relative to perceived competitors. Technology generally lowers prices through increased production and less human labor. Professional politicians want contributions from labor unions that have negotiated long and large contracts. The reduction in world trade will eventually make many nations poorer, including the US.

 

Target the Lawyers

Charlie Munger performed the switch from law to investment management brilliantly. Goldman Sachs also has a number of successful investment bankers and other executives who started with law firms before seeing green. In their defense, some lead M&A counsels at law firms earn close to investment banker packages, with their growing personal accounts residing at money management institutions.  

  

Warning: If some of the trends mentioned continue, the parallel with the Depression is more than likely.

 

What are you doing to prevent it?

 

 

 

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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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Two Cycles Are Worth Watching - Weekly Blog # 793

 

Mike Lipper’s Monday Morning Musings

Two Cycles Are Worth Watching

 

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

 

 

 

Concept

I am basically a student. My reading of history, politics, government, finance, and sports, reveals that each trend reverses somewhat before following a different trend.

 

In selecting individual securities, the specific characteristics are often of primary importance. In constructing a managed portfolio, the analysis of sectors are important. In deciding whether or not to invest, cycles may be the most important factor. All of these considerations need to be adjusted for the identified needs of the owner of the asset. As an investment adviser I must consider these different responsibilities.

 

Below is a review of history through different cycles, along with a view of both the current period and various potential phases.

 

First Investment Cycle

In some respect an investment advisor is like a baseball umpire behind home plate calling balls and strikes. A famous umpire once stated that he calls them as he sees them. As an umpire I call them the same way. The difference is that my initial view utilizes mutual fund data. Not necessarily the best investment research media for all accounts in all situations, but a superior one for relatively unbiased analysis. Other measures rely either on a small group of expert analysts, media employees, or choosing to be listed in a specific marketplace.

 

Unlike the alternatives, mutual funds have in or out cash flows every market day and reflect the periodic decisions of their managers. Since there are more than 15,000 funds, this represents a large number of decision makers. Their results are much quicker at picking up the impact of investor decisions. (My old firm’s data is now published by the London Stock Exchange Group, which purchased it from a subsidiary of Thompson Reuters after it acquired it from me.)

 

Each week I review 107 mutual fund peer-groups over 11 time periods. This week I focused on the total investment return in three time periods: the 5 and 10 years periods and the period since the trough on 3/23/2020 through 7/13/2023 shown below:

 

Peer Group     5-Year    10-Year    Since Trough

Large-Caps    +10.20%    +11.26%      +23.62%

Mid-Caps       +7.42%     +8.99%      +25.74%

Small-Caps     +5.62%     +8.00%      +27.25%

Value          +7.26%     +8.01%      +24.63% 

Growth         +8.37%    +10.06%      +20.23%

 

Observations:

1. Large-Caps won the last 5 years, but not the recovery.
2. Small-Caps were the recovery winner.
3. Mid-Caps with value orientation could be a reasonable bet, probably benefiting from M&A.

 

While “the market” is focused on reported inflation, consumers are not. Using the experience of retail consumers during Amazon Prime Days, the average order was $54.05, up only 3% from last year. A significant increase in buy now, pay later shows that consumers are managing their cash carefully.

 

According to a recent survey, 40% of asset owners are considering indexing. Equal weighting is gathering attention, a positive initial change that perhaps leads to active management later. The more investors congregate in the center, the less buying competition for attractive securities. However, for the best-selling opportunities buyers will have to wait until the too easy choice of the center becomes lonely.

 

Analytical Conclusion:

The current large-cap, growth leadership is unlikely to lead competitive investors much longer.

 

Despite the media hype that we are in a new “bull market”, investors for the most part are considering other issues. Top and bottom prices are established in the market, not through highs and lows in a calendar year. Using historic peak prices, the DJIA is 6.63% below peak, the S&P 500 is down 6.46%, and the NASDAQ is off its top price by 13.77%. We have therefore not been in a bull market. One can view what we have experienced as a rally or a correction. The NASDAQ Composite, the best performing index, hit its high on 11/19/2021. On that basis, we have been in a “bear market” with rallies for almost 2 years. This could be the first part of the feared stagflation, which could last for many more years, using history as a guide.

 

The Major Empire Cycle

One oversight of our Western European focused education system is not studying the repeated failures of various empire cultures around the world, not only in government but in business too. These problems could be avoided.

 

World trade is often the litmus-test relative strength evidence of growing and declining empires. We are entering the test period now. The World Bank noted that China contributed one half of annual world growth over the past few years. Due to current disinflation and deflation readings from China, it is expected to contribute only one third of the reduced size of world growth this year. This weekend The Wall Street Journal had a front-page headline stating “China’s Slowing Growth Has Many There ‘Losing Faith’ “.

 

Instead of the US taking a victory lap, we should be concerned. The math of the situation is that China’s import of US goods and services is dependent on their dollar earnings from Chinese exports. This is on top of Washington’s vote buying efforts restricting risk-oriented investment into the US. Odds are, a top-down Washington directed industrial policy is unlikely to produce positive results quickly.

 

One of the lessons I learned from college fencing was to respect my opponent and his abilities, including some that were not obvious. I feel the same way about China. Even though I have visited Beijing (central government), Shanghai (commercial power), and Shenzhen (industrial development) over the years.  I also spent additional time in Hong Kong where we had an office before HK was returned to China. I do not claim to understand how China really works. It however has one of the longest written histories of any large society, so I know it does work.

 

China has had some form of central government for at least 3000 years. Only rarely has it been ruled by an invader. Most of the time it has been ruled by a succession of dynastic families. Failing dynasties have periodically been replaced by palace revolts or revolutions from the south. During this long period it has been the leading country of the world at times, as well as its scientific leader. At one point it had the most powerful navy in the Mediterranean, before recalling it to be burnt due to politicians at the court not wanting any foreign entanglements.

 

There are two reasons for mentioning this. The first is to acknowledge the world power potential China could have had. The second is to demonstrate that China has always had an isolationist stance. Roughly 90% of its inhabitants are classified as Han Chinese today. Many other ethnic groups within their borders are carefully monitored. The largest being the 3 million Uyghurs and other Muslims which arrived before Marco Polo.

 

During the Song Dynasty (960-1279) there was a great deal of scientific advancement. This advancement was probably based on algebra, which the Chinese invented. Arab traders later used algebra and introduced it into the Muslim and European cultures. Other inventions from China were the abacus, gunpowder, binary code (genetic sequencing), paper making, and printing.

 

The basic unit in Chinese culture is the family. Families are often grouped into Tongs, some of which have led to Dynasties. Loyalty stretched from the family unit up to the courts of the leaders. Most of these units had a singular leader, generally the most powerful man and only rarely a woman. Even today, most groups are led by a dominant male.

 

The present leadership views its power as being derived from providing jobs, housing, and food for its citizens. At the moment there are no known potential rivalries for leadership. However, those on top are undoubtedly concerned about the large number of youths between 16 and 25 without jobs. They are not accepting low-level jobs below their educational expectations. There is two-way traffic for young smart people. Most move to western countries, preferably the US, when given the chance. However, there are a small minority working in the US who experience bias against them and return home, where they are welcomed.

 

Housing is another problem. While a lot of apartment building have been initiated, many are incomplete because builders spent the deposit money on marketing and other unfortunate expenses. The government, mostly through the provincial governments, is trying to help, but progress appears to be slow.

 

Two Conclusions:

1. China is having recognized economic difficulties. However, their disappointing 5% goal for this year is many times larger than the somewhat rigged 1%-2% growth in the US, and no growth in Europe.
2. China in the long run has some built in advantages, such as the Central Asian railroad into Europe which is being built to sell their improving quality goods. Their second big advantage that has become clear to the world is the poor-quality US government leadership, stretching from Afghanistan through Taiwan and into Ukraine. While China is having growing pains, the US is retreating.

 

Under these circumstances it is probably prudent to include some Chinese assets for global diversification as an important hedge against our problems here.     

 

 

 

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