Transactional Signals - Weekly Blog # 840

 

         

Mike Lipper’s Monday Morning Musings

 

Transactional Signals

 

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

 

  

When my term as President of the New York Society of Security Analysts (NYSSA) expired, I turned down staying on the Board feeling that comments by the former President may not be welcomed. I offered to provide inputs privately when asked. I made a similar offer when I moved on from my position as a USMC officer. With that as a background, I found myself in a somewhat analogous position as a member of the Finance Committee of the Board of the Stevens Institute, where I review an extensive report containing the student managed investment fund. 

 

While the other trustees were highly complementary as to the work of the students, I thought they should get a real education from this exercise. I felt the analysis was lacking any discussion of management and its expected retirement. This was logical, as their time period was the length of the current academic term. To me this was trading, as it was not long enough for an investment period. To me, investment periods begin with five years (roughly the average length of many CEOs). I suggested there was a reasonable chance of a new CEO over the 5-year period.  

 

With this as background, I noted with interest the Barron’s article titled “A Trio of Transitions Will Rock Wall Street”. The three are Larry Fink, Jaime Dimon, and Stephen Schwarzman. The article would have been more useful if it had discussed the likely cause of the retirements: recession, unfavorable regulation, stronger competition, new products/services, shrinking internal political support. With aspects of technology and finance coming closer together, changes in the management of Apple, Microsoft, and the Stock/Commodity exchanges, among others, should be expected within the next five years.

 

I will briefly discuss some of the characteristic changes that may impact stock prices within five years.

 

Possible Recession Risk

Any student of economic and financial history knows that there will be periodic recessions caused by the mistakes of leaders and others. If one looks carefully there is usually a small signal that most ignore. One may be what is happening with the ISM data on the manufacturing side of the economy.

 

The ISM Manufacturing PMI survey for May had a reading of 48.7, a contraction from the April reading of 49.2, a fall of 0.5. The survey for new orders fell to 45.4 from 49.1 in April, a sharp drop of 3.7.

 

Manufacturing employment on the other hand went up to 51.1 from 48.5 in April!!! A possible explanation could be manufacturers hiring younger and cheaper people to replace older and more expensive people. Or perhaps there is a miscommunication between the different functions.

 

Two Positive Signals

In May the S&P 600 small-cap index grew 4.87%, slightly better than the S&P 500, both without dividends. If the market continues to rise on speculation, the 600 will be the leader. In May, seven of eleven sectors in the 600 did better than the 500.

 

Small banks, contrary to their larger brethren, sharply increased their purchases of mortgages on commercial real estate. Local banks quite possibly have a better feel for local real estate value than larger banks, which are hundreds to thousands of miles away.

 

Some Investment Managers Can Repeat Being First among Peers.

The London Stock Exchange Group has continued the Lipper Analytical practice of tracking the best performing mutual funds for periods as short as one month through 10 years.

 

This weekend I reviewed what is usually the toughest competition for the eight periods. Eight is listed as the denominator to the extent the category existed for all eight periods, otherwise a smaller number is listed.  (Year to date, 1 & 3 months, 1, 2, 3, 5, and 10 years). I then looked for fund houses that had two or more entries. The data below shows the results of the major peer groups.

                   # of Repeaters

Peer Groups       Winners   Losers

Large-Cap Growth    6/8       6/8   

Large-Cap Core      4/8       4/8        

Large-Cap Value     6/8       5/8

Multi-Cap Growth    3/8       7/8

Multi-Cap Core      5/8       2/8

Multi-Cap Value     5/7       0/7

Mid-Cap Growth      4/8       3/8

Mid-Cap Core        5/8       4/8

Mid-Cap Value       7/8       2/8

Small-Cap Growth    5/7       4/7

Small-Cap Core      6/8       6/8

Small-Cap Value     8/8       3/8

 

Remember, I was looking for repeaters in terms of fund management companies, as there are fund name changes and portfolio manager changes over 10 years. Additionally, portfolio managers can manage two or more funds. The winners tend to stay with their portfolios, although markets rotate. The losers change portfolios in an attempt to get off the bottom, if they still have a job.

 

A Sign of the Times

Due to a money shortage, the Department of Labor announced it is planning to reduce the number of inputs to their surveys starting in 2025.

 

 

Question: What should we be watching?        

 

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Mike Lipper's Blog: Investment Markets are Fragmenting - Weekly Blog # 839

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Recognizing a Professional: Ratings vs Ranking - Weekly Blog # 811

 

Mike Lipper’s Monday Morning Musings

 

Recognizing a Professional: Ratings vs Ranking

 

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

 

 

While we can’t know exactly whether someone is schooled in a subject or just pretending, we can presume a lot from their choice of words. In the world of investment statics there are several tribes of analysts that attempt to predict whether a fixed income instrument will go into bankruptcy. They summarize their learned judgements with letter grades, called ratings. These ratings do not give an opinion as to whether they are good investments, just whether they anticipate them entering bankruptcy. The history of the professional credit raters is pretty good, as bankruptcies are relatively few in number. While they give an opinion as to whether the instrument will enter bankruptcy, they do not indicate how much of the issued principle will be lost.

 

One unfortunate trait of inexperienced people is the use of a term from one subject in another. While the term may have some similarities, it is not identical and may not even have the same utility as the original. This is why I used performance ranks and not ratings when developing the practice of mutual fund analysis, using the performance array of mutual funds we tracked each week. This is where my analytical training kicked in.

 

I pity those who passed through the analytical profession and did not learn as I did at the racetrack. My experience instilled in me a strong aversion to losing money. Analysis at the track is similar to the popular method of selecting investments based on past performance. This approach relies on the belief in the repeatability of events and has led to the development of quantitative systems, both in the investment market and at the track. “Quantitative” investing has periodically been very popular in the investment market, buttressed by “ratings” which are meant to be predictive.

 

 I gained an advantage from my many discussions in the grandstands following each race, where some player complained about the failure of “the system” he/she was following. Because I did not like losing money, I paid attention to the complaints of the failed “systems”. What I discovered was these systems actually worked better than half the time for a period of time, but rarely more than 60-70% of the time.

 

Later in life I heard similar complaints from more senior analysts as the corporations they followed failed to deliver the expected performance. The standard complaint was that someone was lying. It took me a while to connect the similarity of their complaints with those I heard over the weekend at the track.

 

This realization led me to think about the process of predicting the future. Since no systematic thinking produced winners all the time, there must be mistakes in the math. As securities analysis is taught as an adjunct to math, or the certainty of law, the losses had to be a function of mechanical mathematic failure. It eventually occurred to me that it was not the process that failed, but the universe of variables being different than those utilized.

 

At the track, the things that could change were the jockey, the trainer, the exercise rider, what the horses were fed, what drugs were administered, or the competition. Each of these possible changes, and others, could and often did impact results. This is why I believe we should pay more attention to changes of people and their attitudes in the investment world. More so than believing in their statistical record.

 

This week was a good example of changes that largely invalidated the past record of the entire global financial sector. As an analyst, investor, and portfolio manager, I have always had an interest in financial services securities. Stock Exchanges have been at or near the center of the financial sector and thus were always of interest. There have been five Lipper brokerage firms that have been members of the New York Stock Exchange. (Never has a son or younger brother succeeded the founder, and consequently none extended to a second generation.)

 

In most commercially viable countries, there are stock exchanges. Considering all I know about these exchanges; none are making most of their money exchanging securities. At best, most make single digit returns on this revenue. This week I attended a capital markets conference of the 300-year-old London Stock Exchange. While it is interesting looking at their history or past performance, it is of no value predicting their future.

 

Unlike racehorses and most people, some companies can be rejuvenated into something quite different than their past history. In the case of the London Stock Exchange, it has grown into the London Stock Exchange Group (LSEG), primarily through a merger with a Thomson Reuters spin-off. (In 1998 Reuters purchased our fund data business. We and our accounts still own Thomson stock, which has a major position in LSEG.)

 

The spinoff included a number of unintegrated number-crunching entities, labeled Refinitive. It was a comfortable fit because the London Exchange had previously acquired a number of similar unintegrated and under-marketed numbers-companies. To this mix they added “expert” management from various financial and tech companies, including a cooperative agreement with Microsoft based on their plans and/or dreams.

 

The CEO believed he had identified all the problems that could delay them. The current management group is investing heavily in new products and services, including the marketing of them. It would not be difficult to improve on the record of its two major founders. LSEG deserves to be ranked highly in its present efforts. I will leave it to others to predict its future.

 

This Week’s Signs of Stagflation

Despite the media and others chanting Good News, there is increasing evidence that smart professionals see an approaching decline in market prices. Whether we are just in stagflation or entering a significant contraction will be determined later. However, it is worth noting the S&P 500 Equal Weighted Index is essentially flat year-to-date.

 

The following announcements have to do with future revenues. The companies making these statements are addressing the second of two measures of their health, their investment performance and the prospect of generating new business, largely from new customers.

• Manulife is laying off 250 employees in its Wealth and Asset Management functions. (Manulife is a Canadian Life Insurance company with significant Hong Kong sales.)
• Wells Fargo is laying off 50 Investment Bankers.
• Burberry issued a sales target warning.
• A 2^nd Hedge Fund is cutting 150 of its 1000 person staff.
• Jim Chanos is closing his short selling hedge fund. (He said the market is changing away from his style.)
• Amazon is cutting several hundred from its Alexa staff.
• Another observation noted in the weekly list of prices in the Weekend WSJ. Only 8% are down, including the US dollar -1.65%.
• Fitch is negative on the investment management sector in 2024.

 

Note From London

At private investment discussions in London during the week, locals were most concerned about the US Presidential election, with differing levels of pessimism. I had two comments.

1. It is incredible considering the size of the US population that the present apparent candidates are such a poor couple. The locals agreed.
2. Much more important to me is that we won’t know the Chairs of key committees until later next year. This is more important on the Republican side, as the Democrats are bound by seniority. According to the intelligent people I talk with, a split Congress is likely, suggesting not much meaningful Legislation will pass, except for emergencies during the first two years of the new term.

 

Share your views with me and let me know what you are watching in terms of markets and votes.

 

 

 

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Mike Lipper's Blog: How to Find the Answer - Weekly Blog # 810

Mike Lipper's Blog: Preparing - Weekly Blog # 809

Mike Lipper's Blog: Indicators as Future Guides - Weekly Blog # 808

 

 

 

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Bear Market, Recessions, Reinvestment - Weekly Blog # 765

 

Mike Lipper’s Monday Morning Musings

Bear Market, Recessions, Reinvestment

 

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

 

 

H A P P Y  N E W  Y E A R  to  All

 

 

 

An Explanation

For the very first time since publishing these blogs we suspended publication during Christmas week. While most blogs suspend publication in observations of the holidays, we normally don’t. The reason being something could impact our subscribers’ investments every day.

 

Although we mainly focus on long-term investing, each long-term investment journey starts with a first step. Thus, we scan weekly market activity in search of possible initial steps. Transaction volume during Christmas week was low and quite balanced between investors believing we are close to a change in direction and those seeing deeper problems that will take longer to solve. Thus, a relatively flat quiet market did not send signals to me.

 

This week I was faced with almost identical low volume fog. However, I noticed there was more selling than buying on the three main US markets for the week. I recalled that most non-trader investors spend their time waiting, while perhaps also worrying. With those thoughts in mind, this week’s blog is about the critical stages of long-term investing in search of future rewards: Bear Markets, Recessions, and Reinvestment.

 

People have been grappling with these issues since the beginning of recorded time. Since I was not producing a blog this week, I began reading “The Price of Time, The Real Story of Interest”. The story begins with a portion of an inscription found on an Assyrian tablet from approximately 2800 B.C. One of the first written attempts to predict the future states “…the end of the world is evidently approaching.” Therefore, take my views and those of others with a grain of salt.

 

As all life appears to be cyclical, it is appropriate to start the first blog of 2023 with a look at the cyclical behavior of bear markets, recessions, and reinvestment.

 

The commonly used term for a bear market is a 20% loss from a former high. In prior bear markets I have lost 20% of my worth, but I have not lost my source of income (paying job) or main source of cash. During 2022 we certainly experienced a bear market, but luckily not for the full year. The mistake I made in writing my blogs was trying to get ahead of the crowd by labeling what we went through as the early stage of a recession. It neither qualified as an economic recession nor was I out of work, a popular definition.

 

My problem as both a portfolio manager and blog producer is the timing of labeling a recession, as it officially gets labeled a recession long after it begins. The pending label is useful in timing and making investment decisions. However, in waiting for the “official” label, remember that stock and commodity markets generally discount the future.

 

The three types of recessions are cyclical, secular, and structural. Most recessions include elements of each type, with one dominating. The most common type is a cyclical recession, which is generally limited to a price decline from the prior bull market high. The common perception by most investors and apparently the Federal Reserve is that we are likely entering a small and short cyclical recession. (Applying my contrarian nature from the racetrack, I am doubtful that the next recession will be that simple. Historically, if I am wrong, the penalty won’t be very large.)

 

A possible hunting list for stocks might be those that performed well for many years prior to 2022 and significantly declined this past year: Apple, Microsoft, Alphabet, Nvidia, Costco, Danaher, NextEra, Adobe, UPS, Texas Instruments, SalesForce, and S&P Global. All of these stocks have suffered from pricing, delivery, and other short-term problems. These issues also appear to be fixable and seem cyclical in nature. I or our accounts own some of these issues.

 

The second most common type of recession is a secular recession, which is caused by changing elements in the foundation of society. This type of recession generally has a lasting impact on the economy. Think in terms of women working outside of the home after WWII and expanding the number of people working, changing the size of homes and gross income.

 

We may be entering a period where a large portion of the population are not qualified or prepared to work in the traditional payroll structure. The most significant change could be the US, UK, Canada, EU, and Japan failing to reproduce at a sustainable population rate. Another problematic change is US students ranking in the middle to lower range on global tests below the college level. Quantitatively and qualitatively, there is concern regarding our future leadership.

 

As we move to succeeding generations, the society and economy may adjust to these “abnormalities”. Thus, they would be considered secular changes and hopefully not structural changes.

 

I suspect these types of changes cause long-term institutions to modify their portfolios. This may be the reason the State Street Investor Confidence Index decreased to 75.9 from 90.3 in the fourth quarter. Of interest are the different global readings: North America 72.2, Asia 86.9, and Europe 102.6.

 

The third and most uncommon form of recession is caused by structural change, where the way people think about earning money changes and never goes back. Typically, these changes are driven by technologies like the steam engine, the automobile, semiconductors, or by basic changes in government, such as divorce and inheritance laws.

 

The problem I have in questioning the type of recession relates to its likely frequency and financial impact. Which in terms of severity, from most to least, are cyclical, secular, and structural. However, in terms of significance to family wealth, the order is in reverse.

 

If one believes there is an all-knowing power in the sky wanting to eventually adjust the way humans operate, it might be by using economic cycles to correct for the way we screw up our lives. Economics is the historic tool that forces us to do the right thing.

 

There are multiple imbalances in almost every sector of our society and its messenger is the economy. There is hardly any part of society today whose leadership possess superior political skills, not operational, or judgmental abilities. Since we seem unable to solve these problems ourselves, we are going to be nudged in “the right direction” by a secular or structural recession. Corrective actions won’t likely come from a short or mild recession, as that would be like putting a Band-Aid on a gunshot wound.

 

While I clearly don’t know, I am on watch and ready to adapt the right moves to protect my responsibilities.

 

 

 

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Mike Lipper's Blog: Week in Conflict Leads to Buy List - Weekly blog # 764

 

Mike Lipper's Blog: What does your 4.0 Profile Tell You? - Weekly Blog # 763

 

Mike Lipper's Blog: Week Divided: Believers vs Investors - Weekly Blog # 762

 

 

 

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How Deep & How Long - Weekly Blog # 736

                                    

Mike Lipper’s Monday Morning Musings

How Deep & How Long

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

Concerns

Periods of low volume and relatively small moves are normally comforting and allow us to avoid making decisions. My biggest concern is that I may not see enough that is important and draw the wrong conclusions. 

As a contrarian and entrepreneur, I am normally at ease being lonely or a minority in my thinking. This approach has worked out reasonably well for me and my clients. I am increasingly concerned that several others, including some well-known leaders, are voicing similar concerns about the future of global markets and economies. Could we be talking ourselves into a bear market and recession?

Tea Leaves

The following are very brief comments largely from one of the most erudite market research departments in our business, Bank of America Global Research, supplemented by other insights:

1. The NASDAQ is up 11% from its May 20th lows, despite Brainard. (The Fed has flip-flopped back to hawkish), JOLTS were strong not weak, oil was up not down, there were CEOs pessimistic, Microsoft gave lower guidance, and Moody’s gave no guidance at all.
2. Oil prices are annualizing a 108% gain, surpassed only in ’99 during the TMT bubble and during the ’74 oil shock.
3. Will it be the Summer of Volcker, with the central banks just getting started and a “no fun” Fed till done?
4. Popularity of corporate high yield by issuers and investors.
5. Private clients want yield, quality, and growth defensives, in that order
6. The Bank of America Bull & Bear Indicator moved to extreme bearish, the lowest signal since June 20. (Even though brokerage commissions are currently small, transaction activity is good for brokerage firms.)
7. NASDAQ bears are ending as Quantitative Trading begins
8. Global food prices were up 30% for the past 12 months. Housing prices globally are sharply higher. For many, the increase in the “value” of their home equals their annual working income. Inflation is rising much faster than wages. We have the highest ratio of vacancies to “unemployed”. (Remember, some with “off the books income” are counted as unemployed).
9. Shadow banking’s strength through an economic decline can be questioned and may be expensive for the economy and borrowers.
10. There are some who believe the bottom has already been reached and tested. (Doesn’t seem correct)

My review of Barron’s weekly data I found of interest:

1.  While the number of shares traded on the NYSE and NASDAQ was similar, more shares were sold than bought for the week in each case. There was a distinct difference in the frequency of new highs and new lows on the two markets:

           # New Highs   #New Lows   # Listed

    NYSE        155         112         3611

    NASDAQ       64          38         5470

As the NASDAQ attracts a greater percentage of professional speculators, one might conclude that the week’s volume was generated more from public investors and wealth managers than public investors directly.

2.  This focus on the strength of the NYSE comes at the very time equal weighted performance indices are performing better than capital weighted. This is true for the S&P 500 and for 9 out of 11 sectors.

3.  The weekly summary of the American Association of Individual Investors (AAII) survey is a contrary indicator of market turning points. This week’s survey moved away from its extreme readings to a more neutral position, 32%/37% respectively.

Mutual Funds

The weekly performance of mutual funds often describes the forces driving the US markets. The table below shows the only 4 fund peer groups which gained 5% for the week ended Thursday, along with their performance for the latest 52-weeks and 5 years:

Peer Group        Week    52 Weeks   5 Years

Equity Leverage  +5.92%    -15.14%     +5.62%

China Region     +5.71%    -31.07%     +3.92%

Global Tech      +5.66%    -24.47%    +13.42%

Science & Tech   +5.46%    -16.01%    +15.15%

While the week’s performance leaders were close together, they were recovering from quite different depths. Additionally, the performance rank within group was a reversal of the performance for five years. This suggests short term performance is not indicative of long-term performance. I am a little surprised that the advantage of leveraged performance was not greater. The spread between the Global Tech Fund average and the more domestic Science & Tech Funds may be a function of the relative strength of the dollar, which is unlikely to continue indefinitely. 

Important 

The recent rise in the China Region reflects a recovery from Chinese lockdowns and an apparent change of attitude in Chinese political leadership. The last observation is worth following closely. We are seeing more tensions between President Xi and Premier Li Keqiang. There are several political factions within the CCP and most need to be allied with Xi for him to win an unprecedented third term. There will quite likely be some horse trading between factions, which may impact the attractiveness of investing in Chinese securities/funds, as well as in world trade.

Warnings

JP Morgan Chase and Goldman Sachs are the big leaders in global M&A facilitation and investment banking. Both the President of Goldman, John Waldron, and the Chair of JP Morgan Chase have issued warnings about difficult times ahead.

Inflation and Shortages

Evidently, we have been told there is disagreement within The White House and possibly some Cabinet members on how to address the rising level of inflation, believed to be caused by shortages. Some wish to stop price increases by lowering the demand bidding up prices. However, the way to lower prices is by increasing supply. 

At least half of current inflation could be reversed by withdrawing our restrictive energy policies and by reducing tariffs to help our lower earning population. 

Shortages beget other shortages and misplace consumer, industrial, and investment allocations. 

Election Bet

While the 2024 Presidential election is two years away, it is an appropriate time to guess its outcome and impact on investment portfolios. The general view is the 2024 election will be a re-run of 2020. If it were to be, then my guess is the election will turn on the political skills of the Vice-Presidential candidates, who will do more of the heavy lifting. The bet becomes more interesting if only one of the previous two candidates runs, as he and his party will likely lose. My best guess is congressional and big city leaders have too much to lose and will force some changes.

If there is not much progress addressing US problems, whoever wins in 2024 will win a “poisoned chalice”, as most of their time and effort will be spent attempting to rectify leftover problems. As someone who has invested in turnarounds, I believe a reasonably complete turnaround will take at least five years. 

From an investor’s viewpoint, this unhappy set of circumstances suggests the period will be marked by relatively low returns in the mid-high single digits. These results will permit many to retire carefully, but not with a cushion for emergencies or estates to pass onto children.

Please share your views. 

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

https://mikelipper.blogspot.com/2022/05/falling-confidence-beats-numbers-but-be.html

https://mikelipper.blogspot.com/2022/05/inconclusive-but-trending-lower-weekly.html

https://mikelipper.blogspot.com/2022/05/three-worries-april-near-term-slowdown.html

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“New Normal” Unlikely to be a Repeat - Weekly Blog # 635

Mike Lipper’s Monday Morning Musings

“New Normal” Unlikely to be a Repeat

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

Analysts love history, believing the future will be a repeat of the past. Almost every force for change today is itself changing. There is so much changing that there is a great temptation to retreat to cash or a central value index. Quite probably, the least realistic and useful diagram for the future is a straight line. However, there are a series of mathematical manipulations that may be useful in identifying the multiple “New Normals” we will go through.

I believe it was in the second year of algebra that we were introduced to simultaneous equations. In these equations each formula has a different unknown, requiring each to be solved before completing the entire equation. There were other useful exercises that could also be helpful in our search for an investment strategy. The first, which was mislabeled as geometry rather than logic, was proving theorems. In that exercise we segregated math formulas between those that supported the theorem and those that did not. The correct solutions were based on the logic displayed, not the number of pros and cons. Perhaps the most useful math we learned was the math dealing with circles and semi-circles. I believe that learning to think in circular patterns is much more representative of the reality of human (market) behavior.

Where We Are is More Important Than How Far We’ve Traveled
Utilizing the two-sided balance sheet approach, I will divide the current inputs between those I perceive as positive for long term investing in equities and stock funds vs. those that increase the risks of losing money.

Positives
In analyzing data we look for indicators that on balance successfully predict the future. Positive indicators are normally correct more than half the time. However, what is even more valuable are the rare negative indicators. On a contrarian basis they are correct more than 75% of the time.

1. One of the best negative indicators is the sample survey of the American Association of Individual Investors (AAII). In the latest week, for the second week in a row, the survey is increasingly bearish, 48.9% and 47.8% respectively. A more normal three-part distribution has numbers in the thirties, as it was three weeks ago when it was 38.1%. Rarely do the weekly readings go over 40% and it is extremely rare for any choice to exceed 50% for the six-month outlook. 
2. Private clients at a large US brokerage firm bought equities for the first time in eleven weeks.
3. Individual investors are not constantly wrong, although they tend to make up their minds slowly and consequently tend to be wrong at turning points. (Data is no longer corrected on transactions below 100 shares, so we can no longer use the odd-lot theory.) If we look at total flows, we see net purchases of $11.3 billion for fixed income securities and funds, including $2.6 billion going into TIPS and $5 billion net outflows from Equity. These flows are forcing the prices of fixed income products up and their yields down. This reflects market action and is not a predictor of future interest rates.
4. We appear to be in two different markets at the same time. The daily stock price chart for the NASDAQ Composite is in an uptrend and has been establishing new highs. The other two main market index price charts look to be forming a temporary top, despite 24% of the S&P 500 being invested in FAANG stocks plus Microsoft. In 2013 the same stocks represented 9% of the index.
5. Rising freight volume carried in trucks is expanding, leading to capacity expansion.

Negatives

1. The Citigroup Panic/Euphoria Model is predicting a bearish period one year away.
2. Investors are pouring money into fixed income, even though there is a long-term expectation for higher interest rates driven by inflation. One example of this is a repeated issue of a 100-year bond from Austria, a country without a particularly bullish outlook. A pitch used to sell very long bonds is that it avoids having to make more frequent decisions, which can be wrong!!!
3. Some US investors are investing outside the US or the dollar. Of the 25 best performing mutual funds this week, 16 were precious metals funds (gold), 3 were emerging markets funds, 2 were China Region funds, 2 were India funds, and only 2 were invested in domestic small caps. Except for the precious metals group, the individual holdings in the other 9 funds appear more important that a sector bet.
4. The VIX indicator of worry is selling at twice last year’s rate.
5. Friday’s volume rose, which is not normal in the summer months, revealing interesting results that need to be further examined. The stock of T. Rowe Price lost 7.62% for the week, even though it published good results. On Friday, Janus Henderson had a market volume of 10.66 million shares, where the normal volume is 1-2 million shares.

Conclusions

1. We should not expect some clear straight-line news any time soon. That is not to say various pundits will not extoll these points of view, but on careful examination the precision of their views will come into question.
2. Despite what various political leaders state, we live in an increasingly integrated world and that is a net good thing, although it has a price, among other difficulties.
3. At today’s prices we are being paid to take long-term equity risk and are not being compensated similarly for fixed income risk taking.
4. We should focus on the announcement of capital expenditures in order to see how much is being invested in new products and new distribution, or see if it is being used to lower existing costs.

What Do You Think?   

 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html

https://mikelipper.blogspot.com/2020/06/caltech-data-heretics-go-to-track-for.html



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A. Michael Lipper, CFA
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HATE DOESN’T WORK FOR INVESTORS - Weekly Blog # 617

Mike Lipper’s Monday Morning Musings

HATE DOESN’T WORK FOR INVESTORS

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

Few if any investors like the current market, where on relatively low volume volatility has picked up, particularly intraday. This suggests that the stock market is dominated by relatively few traders with strong views. To the extent that bonds and credit instruments are sought to provide reasonable income, investors are finding current yields unattractive. The continued increase in demand for fixed income suggests that yield is not a driver. Some investors, perhaps counseled by investment advisors, suggest that bonds and credit instruments will be a safe port in the anticipated coming equity storm. The growth of corporate and individual debt, plus the deficit spending by most of the developed world, suggests there will be something of credit crunch. This may surprise holders of fixed income securities when they see an increase in the volatility of prices.

Nevertheless, people are being driven by “hate” of stock price volatility. While this blog is intended to deal with investments, it recognizes the environmental background influencing the decision process for some investors. If they can hate certain political leaders, geographies, foods, and sports teams, why can’t they hate certain investments?

Years ago, there was a very successful Broadway production and movie titled “Damn Yankees”. It was the story of a long-suffering former Washington Senators baseball fan whose team could never seem to defeat the New York Yankees, preventing them from getting into the World Series. His solution was to do a deal with the Devil, which enabled him to become a baseball player “phenom” for almost a full season. He led the Senators to victories right down to the last play in the last game, when suddenly the Devil’s magic wore off. He returned to his former state as a middle-aged lamenting fan as the Senators never learned to play better or get better players. (The losing team eventually left Washington and over the years were replaced by a new team using the old beloved name. Readers can make up their own minds whether this myth should be applied to the Senators working on Capitol Hill.)

Apple (*), Tesla, Microsoft (**), and perhaps Amazon are stocks that some investors have “hated” at various points in time. Historically, this has been a mistake for the following reasons:

1. The most important thing about any stock or bond is its price. The physical and intellectual scrape value may be worth a substantial premium.
2. In many cases there are good people in failed companies who have learned from their experiences. They now provide substantial help to others, some of which are winners.
3. The downfall of the hated may well be due to improvement in the opposition.
4. The nature of competition may have changed, benefiting the hated. (Microsoft and Apple are good examples)
5. Internally, hated leadership can change.  

(*) Owned in personal and managed accounts.
(**) Owned in funds utilized in managed fund portfolios.)

Once again, we urge investors to sub-divide their portfolios into slices of expected payments needs. Earlier payment periods should have less equity and more low-yield, money market fund type investments. Periods beyond ten years outside of opportunity reserves should be equity oriented, particularly legacy accounts. Payment slices in the five-year range should have at least 50% invested in risk products at all times.

To avoid falling into the “hate” trap, make a list of three positives and more negatives.

Question? Have your “hated” investment opportunities cost you?



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2020/02/investment-losses-can-be-prots-weekly.html

https://mikelipper.blogspot.com/2020/02/the-art-of-portfolio-construction.html

https://mikelipper.blogspot.com/2020/02/significant-turnaround-two-fearful.html



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Copyright © 2008 - 2019
A. Michael Lipper, CFA

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Repeat Past History Probable or Just Possible? - Weekly Blog # 609

Mike Lipper’s Monday Morning Musings

Repeat Past History Probable or Just Possible?

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

Historical Lessons 
Like most professional investors my first tool in dealing with an uncertain future is my knowledge of history. I pay particular attention to military history and horse race betting. The growing enthusiasm for the US economy and stock market is leading many other markets higher. An almost universal belief persists that 2020 will not see a recession. One sign of a top is excess enthusiasm and we appear to be marching quick-time along that path. Military history warns of the dangers of a sneak attack.

Many historians studying the last two World Wars point to the underlying causes and the immediate events preceding them. The underlying cause of both wars was the presumed weakness of the US, both economically and militarily. It lacked the ability to maintain the global balance of power when presented with increasingly aggressive drives by Germany and Japan. The initiating causes presented to the public were the assignation of the Archduke, heir, to the Austrian Throne and the sneak attack on Pearl Harbor. These events gave political cover to the leaders who sought to defend their countries by going to war.

I am not predicting these types of events, but I am aware that they can happen. Consequently, I’m examining possible triggers for a meaningful reversal of the current enthusiasm, which could cause chaos in both the stock market and greater economy. The resulting chaos would not be so bad, except to investor egos and confidence. Sun Tzu, the earliest great military/political strategist is quoted as saying "In the midst of chaos, there is also opportunity."

Contrarian Signs
1. In the US the fixed income market is much larger than the market for stocks, a reality not captured by the media. The owners of fixed income securities expect to either own them through maturity or play price peaks and valleys, adding or subtracting price movements to their total returns. As the terminal value at maturity is known when these securities are issued, investors become much more aware of anything that could reduce their value. Most issuers are directly or indirectly influenced by the movement of interest rates and are therefore much more sensitive to economic conditions than most stock buyers focused on corporate prospects. Fixed income securities prices often move six to eighteen months before the stock market reaches a peak or trough.

Adjustable mortgage base rates have started to rise, although they are well below the rates of a year ago. The yield curve for US treasuries is rising, especially for maturities that are five years or longer. The year-to-date average total return for the 43 General US Treasury mutual funds is a way above average +10.69%, but has declined -2.01% in the fourth quarter through last Thursday, suggesting the deterioration is relatively new.

"Bond Risk Seen in Leverage Loans" was the headline in the weekend edition of the WSJ. The article focused on the ratio of credit rating downgrades to upgrades, with 3 times the number of downgrades to upgrades on traded loans. The Financial Stability Board also noted the weakened documentation of loan agreements, i.e. weakened covenants.

2. One of the more common places to hide from expected market, currency, or economic declines is precious metals. Currently, there are 65 pure stock fund investment objectives tracked by my old firm. Of these, only 7 are up over 30% for the year through Thursday. In third place are the 76 Precious Metals Funds which have averaged +37.41 % year-to-date, with 16 being among the top funds for this week. Interestingly, the price of physical gold is not higher than it was this summer, suggesting stocks of gold and other precious metals mining companies are viewed as having better prospects than the price of the metals. This may be true, as their earnings will benefit from both their debt structure and their high fixed-cost operations.

3. In December, corporate insiders sold an unusual amount of their own shares. It could be that they need cash to exercise some options coming due, or that they fear capital gains tax rates will rise materially.

4. In the latest week, half of the 20 stocks in the Dow Jones Transportation Index declined. As passenger traffic is good, I suspect sellers are expecting lower than forecasted freight revenues, which aligns with the lower expectations of their industrial customers.

5. There is not much difference in the five-year total return performances of the following four investment objectives:

Domestic Sector     +5.79%
World Sector        +5.89% 
World Equity        +5.93%
Mixed Asset         +5.82%

All had hoped to beat the leading equity investment objective, US Diversified (USDE) +8.99%. It appears that on average, being diversified produced a roughly 3% advantage over more narrowly constructed funds. It is worth noting that the five-year returns were roughly equal to the progression of earnings and returns on equity, although those observations should not apply to a portfolio of funds gaining 20% or more.

While each of the following investment objectives generated way above average gains for the past fifty two weeks, they did not outperform the USDE funds return of +29.93%.

Domestic Sector   +25.54%
World Sector      +26.70% 
World Equity      +24.26%
Mixed Asset       +19.71%

The last category was hurt by the inclusion of poorer performing fixed income and international holdings.

6. Of the 17 non-leveraged peer groups of funds within the USDE classification, seven performed within the range of the above-mentioned groups of funds. Offsetting these slower performing funds were four growth fund peer groups and S&P 500 Index Funds. However, as stated in earlier blogs, one should look deeper. You should recognize that the NASDAQ Composite has been the leader of the popular stock indices for some time. This composite added 1000 points in 176 trading days. Nearly one third of the gain was attributable to the five stocks shown below. The table displays their gains and weight in the NASDAQ Composite:

                                 Weight in
Stock Name Wtd Gain     NASDAQ Composite
Microsoft         +56%              8.8%
Apple             +83%              8.4%
Amazon           +23%              7.1%
Facebook          +58%              3.6%
Alphabet "C"      +31%              3.5%

Many stocks in smaller market-cap peer groups also benefited as suppliers to the five stocks mentioned above. The key observation is that the gains in the averages are not representative of many stocks. Thus, some of the enthusiasm for the market and the economy may prove to be misplaced.

Investment Conclusions
For many long-term accounts, this is not the time to be adding additional risk. Because we are late in the investment cycle, disappointments could trigger sales. Particularly large gains have unbalanced many accounts and should gradually be re-adjusted.



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/12/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2019/12/faulty-decision-processes-at-change.html

https://mikelipper.blogspot.com/2019/12/investors-are-worrying-about-wrong.html



Did someone forward you this blog?
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2019
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.