Unclear Data Mostly Bearish, but Bullish Later - Weekly Blog # 870

 

Mike Lipper’s Monday Morning Musings

 

Unclear Data Mostly Bearish, but Bullish Later

 

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

 

 

 

First Half

Marcus Ashworth is one of the best market analysts who writes daily for Bloomberg.  In a recent piece he focused on volatility, with the following introduction:

The election of Donald Trump introduces an 

unwelcome capriciousness to US policy making,

with everything from trade to regulation to crypto-

currencies looking decidedly less predictable. And 

while the US consumer continues to defy expectation

by keeping the world’s largest economy rolling

along just fine, the rest of the world is a lot less

robust. Our key message for 2025: Buckle up, it’s

“gonna” be a roller coaster.

 

It is my own view that even Mr. Trump does not have a complete view of what is going to happen. As shown in the recent election of the House Speaker, members of both the Senate and House act differently than the majority of their party and will be paid off in some known or unknown way. Furthermore, going back to early American history, foreign powers will express their will and influence on our results and actions.

 

Chartists’ Views

We have heard many times that history does not repeat itself but often rhymes. One of the easiest ways to record the rhymes is through charts, which are often right as to future price moves. They have learned that future reversals can frequently be successfully predicted. The standard pattern for trend reversals is a “head and shoulders silhouette”. The three or more peaks with the center one being the highest shows each of the peaks declining to a common neckline. Currently, the two shoulders have hit their necklines and bounced up a bit. Most important to me, this describes the S&P 500 price action. If it breaks the neckline that indicates the likely chance of a significant decline.

 

Historically, significant declines often follow substantial increases, like those we have experienced. Declines often occur after valuations have been stretched like a rubber band. The measure I find helpful is the ratio of market value to book value. Currently, the S&P 500 ratio is 5.37x vs 4.58x a year ago. This seems like quite a stretch.

 

AAII

Many professional analysts look down on the retail market despite a reasonably good long-term track record. Like many others, it tends to be wrong at turning points. The AAII sample survey asks their participants if they are bullish or bearish for the next 6 months. I find the percentage difference between the bulls and bears of interest. The spread for last week was only 1.9% vs. 3.7% the week before. In each case the bulls were on top. My reading is that these investors are usually very intense in their views. The view they share with many professionals is that they are waiting, but don’t know what they are waiting for!

 

Other Straws in the Wind

Many of these relationships could change significantly:

• The bottom third of credit card holders are tapped out.
• The five best-selling car brands in the US are foreign.
• Only 44% of weekly prices tracked by the WSJ were up in the latest week.        

 

Most Funds Don’t Perform

There are 103 peer groups that I look at to see if they on average beat the S&P 500 Index fund. Below are the results showing the number of Equity and Equity Related Fund Groups that beat the average S&P 500 Index Fund for 1, 5, and 10 years.

 1-Year     5-Years      10-Years

   8            4               3

   

Just like following Professional Golfers, the ordinary weekend player can learn useful techniques, avoid many injuries, and enjoy investing.

 

Beware of Simplistic Data

It is popular to compare mutual fund gross sales to ETF sales, taking the difference as an indication of popularity. The problem is fund redemptions are built-in the day a fund is purchased. Redemptions for many holders is the completion of a planned period or condition, regardless of performance. The average age of a mutual fund owner is senior to when they initially purchased the fund. Many redemptions are also mandated by retirement vehicles, such as required mandated distributions.

 

ETFs are like buying individual securities. The buyer is often considerably younger and considers it a form of trading. To net these actions is like purchasing a car for dating when you need a car to get to work or to transport your family.

 

Question: Are there any topics you would like me to explore, or correct?    

 

 

 

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

Mike Lipper's Blog: A Different Year End Blog: Looking Forward - Weekly Blog # 869

Mike Lipper's Blog: Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

Mike Lipper's Blog: Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

 

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 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Next Election vs. Future Generations - Weekly Blog # 766

 

Mike Lipper’s Monday Morning Musings

Next Election vs. Future Generations

 

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

 

  

  

Time Horizons

Behavioral, political, and investment strategies should be selected based on a measurement period, acceptance of errors, and compound returns. While rarely identified, these three factors often control the success of a chosen strategy.

 

Many people are currently very short term oriented, distinct from the expressed time frame driving the Founding Fathers of the US expressed in the Declaration of Independence and Constitution.

 

Four examples of this shortened time focus are:

1.  Selection of Leaders in political, military, health, and corporate sectors. We unfortunately pick leaders with political skills rather than courage to lead in a different direction, with the focus is on the next election or selection. Both Henry Kissinger and Jaime Dimon have written about the lack of foresight in the world’s political and business leadership. (I would slightly disagree. Autocratic leaders seem to be playing chess rather than checkers, which is what our elected or selected leaders are doing.)

 

2.  As revealed in the recent “Varsity Blues” scandal, where some rich parents made illegal payments to get their children into well-known Universities. Their apparent motives were intended to ensure their young got admitted to these schools for bragging rights, while others utilized “legacy rights” at their own alma mater to achieve the same result. (That one’s children do not possess the appropriate credentials to be accepted into these designated schools should have been addressed years ago.)

 

3.  Almost all investment performance data in the press focuses on annual or shorter time periods. This often mirrors the investment focus of many in selecting a fund or manager. (While I can’t predict winners in future markets, I am aware that the poorest performing advisors can occasionally produce the best results in  future periods by recapturing some of the prior lost performance.)

 

4.  On Friday the Dow Jones Industrial Average (DJIA) gained some 700 points. Supposedly this was because of the questionable Department of Labor establishment survey which showed a higher number of workers than expected. (There was almost no coverage showing that only 6 out of 10 employable workers were on the job. For many years, countries with 7 out of 10 workers employed were considered the better locations for investing.)

 

Contrarian Views

The history of market prices around the world suggests that the biggest gains come from a radical change of opinion on the future performance of various securities.

 

After 15 years of the US stock market being home to many of the big winners, there is some sentiment that more global oriented companies will be winners.

 

Markets don’t have to follow nice, neat calendar periods. In the US, stock prices generally rose in October and November then declined a bit in December. It is quite possible that November represented the end of the recovery period that started in June. Suggesting Friday’s gain won’t be sustained for the month.

 

Only 10 out of 104 mutual fund equity-oriented sector averages rose in December. Utilizing securities data on a national basis, only China, Hong Kong, Japan, and Thailand gained over 1% (listed in performance order).

 

Winning the Long Game

One of the long-term reasons mutual fund investing performs better than many managed accounts with individual securities is that the fund industry developed an easy process of reinvesting distributions of income and capital gains. A number of large companies had similar reinvestment procedures in the past, although they were dropped due to lack of interest.

 

One of the lessons learned from the thrift industry is that through the magic of compounding a series of small contributions can produce meaningful returns over 12 to 30 years, particularly in a market of generally rising prices where fund holders stay in the product.   

It is often the small and simple things that lead to investment success: having patience, a long-term time horizon, taking as much emotion as possible out of the investment process, not following the herd and looking for opportunities elsewhere. While these items are simple attitudes, they are often difficult to implement in practice. Investing is an artform; therefore, one should allow for mistakes without deviating from good strategies.

 

 

 

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

Mike Lipper's Blog: Bear Market, Recessions, Reinvestment - Weekly Blog # 765

 

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

 

 

 

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 – 2022

Michael Lipper, CFA

 

All rights reserved.

Two Confessions - Weekly Blog # 700

 

Mike Lipper’s Monday Morning Musings

Two Confessions

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

First, I have not sufficiently considered the world’s losses from our latest global war on COVID-19 and its follow-ons. As with any war it is easy to identify those who have died, but more difficult to identify those whose lives have been upended, particularly the psychologically walking-wounded. It is also too early to understand the likely impact on most of human life in terms of education, travel, commerce, real estate, and most importantly health. We can never entirely go back to the way we were. I need to figure out how the changes will impact those that I care for professionally and personally.

Second, at the instance of crafting my 700th blog, I should confess that I am not an original thinker or first mover. As a perpetual student of investing, it is my task to learn from the past and apply those lessons to present and perhaps future problems. In thinking about this mission it occurred to me that, much as I used to think that I was inventive, I am a product of my family. I owe it to all who may choose to use some of my thoughts expressed in these blogs, that much of my thinking results from my understanding of the actions of three generations of my family's focus on investments. At the end of this long blog you will see how I apply the experiences of the  past to the current market and investing for the future.

One of our long-term subscribers, with a background in management and data management practices, has just published a  book of poems. One of them has to do with his efforts to pass on his successful investment views to his family. Barry Faith has given me permission to republish his views below, showing him to be a kindred soul:

HELPING

A strong purpose in my life is investment in the future, and a key part of that is to have values that are passed down the generations.

Helping with our family Is the way I want to be.

Helping them to build and grow, Helping us to reap and sow.

With each passing generation So we build our family nation, Parent to child and so on

Long time after I am gone.

So set the ethos, live the creed, Create the thoughts, do the deed.  Build for those yet to be born,

To that end let us all be sworn.

© Barry Faith April 2014

If you want to only see my investment insights without the historic background, go to the section titled "Current Views".

The Three Arthurs

At the beginning of the 20th century my grandfather moved from Philadelphia to become a member of the New York Stock Exchange. Over time with partners, he built a "carriage-trade" retail "wire-house" to serve both wealthy Americans  overseas and locals investing in US stocks. The firm opened offices in London, onboard ocean liners, and elsewhere. (The London office was the first of three to bear our name. It was followed many years later by my brother's and my own firm. Through the years five Lipper firms were members of the NYSE. These firms were never headed by a son or younger brother succeeding the founder. This  history may be why I believe generational succession is difficult to pull off. The younger generation is not a copy of the older generation.) My grandfather's firm developed a reputation for being an honest broker, acting as an agent, never as principal. There was no market making and no underwriting. While there were other brokers who were honest, he was referred to among his clients as “the honest broker”)

The next Lipper firm was my father as an independent floor broker. Although he never really liked that role, he enjoyed  daily backgammon or gin rummy with other members of the lunch club. A few of the lunch club participants became his friends. He was not a student of anything, let alone the market, but he learned who were smart and trustworthy on the exchange floor. Through one of these people he bought stock in an electronic connector company that surprised me. At the time I was a junior a junior electronics analyst, looking deeper than he did. The key to the stock was a smart group of Texans being the dominant shareholders. They had the company open manufacturing plants in Puerto Rico and enjoyed a ten-year federal tax holiday.  (I learned that tax management was a skill that could provide benefits, something not taught to in my Colombia University Security Analysis courses. This lesson was later applied to an accidental holding in Apple.)

The third Arthur is my brother, now living in California. He is the single most creative person I know. His career on Wall Street started as a way for him to return to Japan, where he experienced very happy "R&R" leave as a US Marine serving in Korea during the Conflict. He developed into a successful institutional salesman, selling his own statistical research and some very good fundamental research developed by his partner. Arthur's greatest skill was putting himself in the client's position and seeing ways to improve their business results,  a skill greatly appreciated in the offshore fund market. I created a new NYSE member firm to serve these clients. I was later asked to join the firm to develop research for a broader universe. To support his clients' needs he opened offices in London, Geneva, Tokyo, and Buenos Aires, while I open a small research office in Washington DC. Some research work was done in each office, which I tried to coordinate. The Washington office was the first brokerage research office in D.C., where we focused on how the present and contemplated        actions of the federal government impacted individual securities. (As with tax management, the impact of government actions were not taught in Security Analysis courses. Today, these two aspects may be more important than quarterly earnings estimates.) After the economics of the brokerage commission business changed in 1968, Arthur closed the firm in 1971. Later, his former chief trader talked him into starting a new institutional trading firm.

No family history of people influencing my thinking would be complete without acknowledging two remarkable women, as well as the legal profession on my mother's side. The  lawyers were involved with wills and trusts, as well as the proper  administration of them.

The first remarkable woman was the original's Arthur's wife, who really cared about people and arranged lavish but tasteful entertainment. She was often referred to as her husband's best salesperson. For many years at family dinners there was a widow of a late former busted client of the firm. Though her position was significantly reduced, she was treated with great dignity. (The lesson was to recognize one's own good fortune by taking care of other individuals who through no  fault of their own were less fortunate.)

The second remarkable woman was my mother, who did not attend college but was able to be a critical assistant to Wendel Wilke during his second attempt to be the Republican Presidential nominee. She was later active in committees to support The Marshall Plan, the United Nations, and some other Democratic issues. I believe she was also helpful in getting my brother an appointment as a page in the US Senate, a life changing experience for him. She was what my grandfather    called a "joiner", giving help and assistance to many causes. (This may be why I felt somewhat comfortable joining both The  New York Society of Security Analysts and the International Society of Exchange Executives Emeriti, eventually taking leadership roles. These roles prepared me for sitting on Caltech's and The Stevens Institute boards, as well as the Columbia University Medical Center Board of Advisors. While I may have been helpful to these organizations, I learned a great deal concerning the  politics of non-profits during a turnover of leadership and surrounding conditions.)

Current Views

Caveats: The most consistent product of the investment cycle is humility. The surviving veterans are mostly humble and will talk of their errors with me. I have made mistakes in the past, including some I may not recognize. My goal is to recognize mistakes more quickly and rectify them.

Popular Comments:

The US Stock Market has been in a narrow trading range for most of the year. Examining the numbers and dates enables one to see a more complex picture. The closing 2021 low for the S&P 500 was on January 4th, for the Dow Jones Industrial Average on January 29th, and for the NASDAQ Composite on March 8th. The different dates suggest there are at least three different stock markets going on. I believe the differences are not accidental and meaningful in terms of changing market structure.

The DJIA is a retail measure, not because retail investors invest in “The Dow”. But due to the time pressure on the electronic media and the reduced news hole in local papers in smaller markets and in the “fly over” portion of the country. The S&P 500 is the favorite of institutions with large amounts of money and limited staff, as well as former brokers now stylized as “wealth managers”. The last group are now freed from anti-churning rules designed to prevent them from trading to generate brokerage commissions. Although they now charge account fees, they are conscious that they need to be seen as active to earn their fees, particularly with new managed accounts customers. (Later in this blog I suggest lower turnover rates are favorable, especially for taxable accounts.) Wealth managers are particularly fond of ETFs and my guess is that this is the reason Equity ETFs recently suffered net outflows of $20 billion compared to the larger and more long-term oriented mutual fund net redemptions of $2 billion. I believe this is a major cause of the volatility expressed in the S&P 500.

Of the domestic market indices, my favorite is the NASDAQ composite. Most passive money is invested in stocks that predominate the S&P 500. There is relatively little wealth management money invested in the NASDAQ, particularly outside of the high-volume, NASDAQ listed, FAANG stocks, e.g., Apple. Why is this important? For the last several years the NASDAQ has led the other two market indices, going both up and down. A week ago, all three markets dropped, opening a major gap in prices. This week, the gap was barely closed by the rising prices of the other two markets, but not the NASDAQ. Market analysts believe a gap must be closed before a change in direction is confirmed. My view is to watch the NASDAQ for future market direction.

Wrong Treasury Message

Traditionally, most stock and bond markets around the world are priced off the market for US Treasuries. The yields on treasuries have not risen, not even in response to the Chair of the Federal Reserve as he reads the inflationary outlook, which during this Presidents term will be 5%. Despite this and the probability of larger deficits, foreigners are heavy buyers of US paper. To me this suggests much of the outlook outside of the US is not favorable.

The Pundits March in Wrong Direction

In analyzing successful investments over long-periods of time for taxable investors, there are four keys to investment success. They are in order of importance:

1. Terminal Price

2. Period Held

3. Purchase Price

4. Present Market

In the next pitch of a pundit/sales assistant, count the words spent on each of the four and you will generate a useful reliability ratio compared to others.

Personal Outlook and Plans

Because of my trading genius, I expect there will be a 10% drop soon after a purchase. Within a decade of purchase, a 25% decline is reasonable. Over 25 years or a generation, a fall of 50% could happen. What to do? If you refer to the four indicators mentioned above, the two highest haven’t changed, nor the purchase price, leaving only the present market indicator. As it is the least important, I recommend holding until fundamental information of structural change appears.

My current plan is to think through possible major changes and examine companies, sectors, and strategies I haven’t in the past. Suggestions are welcome. 

  

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

https://mikelipper.blogspot.com/2021/09/observations-prior-to-excitement-weekly.html

https://mikelipper.blogspot.com/2021/09/3-thoughts-to-ponder-weekly-blog-698.html

https://mikelipper.blogspot.com/2021/09/uncertainty-is-inevitable-weekly-blog.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 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

An Investment Dilemma with a Possible Solution - Weekly Blog # 658

 

Mike Lipper’s Monday Morning Musings

An Investment Dilemma with a Possible Solution

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

                           

The Problem

Many of us have become addicted to the force of momentum in many aspects of our lives, including investments. We feel more secure in our judgements by going along with the crowd, particularly if we self-select the crowd, as there is an element of fear being outside the crowd. Is there something wrong with us?!

Current Situation

After record investment performance for many market indices and our own accounts in November, we believe that as owners of US stocks, not only are we bright but right. We hope the momentum will continue, for if we annualize the November gain our investment performance will generate an annual return of 100% or more. That is the problem, even if our egos question the probability of that happening.

Our Focus

Since there is so much investment momentum being celebrated by pundits and investors, subscribers don’t need any more “feel good” coverage, at least from me. Professor David Dodd hammered home the point that the entry price is the single most important factor in making a wise investment. That is the price relative to all the other factors. In a similar way, the most important lesson for betting at the racetrack is the spread between the betting odds and our perception of the future results at the finish line. In both cases there is a single underlying presumption, that on average the best company or horse may not be the best bet in terms of building capital. With that as a guiding principle, I offer up some contrarian inputs. I am not expecting to be instantly correct, but believe these views along with patience will produce sustainable capital for my investment responsibilities.

Contrarian Inputs

• The “Buffett Indicator is closing in on its former high of 187% vs its current reading of 180. (This is Warren Buffett’s most reliable indicator of a top and measures the aggregate market capitalization against GDP.) Due to the costs of the pandemic, the capacity level of the economy may be understated. It is fashionable for younger investors to discount the wisdom of Mr. Buffett, although the market has a habit of proving him right. Many doubted the wisdom of Berkshire’s private investment in Occidental Petroleum, although this week it was one of the best performing stocks, up +12.3%. (Berkshire Hathaway is a position in our financial services private fund and other accounts)
• This week’s reading of the CRB Raw Industrial Spot Price Index was up +15% year over year. The index is heavily weighted toward the price of scrap metal.  Not only in China but elsewhere, scrap is needed to produce completed metal products. (Despite Central Banks/National Governments putting a lid on government debt interest rates, I believe there is a reasonable chance of them doubling before the next US Presidential election, led by consumer purchases of both manufactured and agricultural goods.)
• Both individual and institutional investment accounts are shedding cash. (The tops of markets tend to coincide with the absence of fresh cash to keep upward momentum going.)
• There is a lot of wisdom in mutual fund investors, This may be particularly true with the existence of Exchange Traded Funds (ETFs) being used for shorter-term market judgements. This reinforces the belief that the bulk of money invested in mutual funds is long-term, slated for retirement and similar purposes to be used in the distant future. According to T. Rowe Price, the average 401(K) participant is investing 8% per year. (I suspect that other non-mutual fund investors are not similarly saving for their retirement and long-term needs.) 65.8% of all allocations in US mutual funds are invested in diversified equity funds, which have grown +12% vs the all equity fund return of +8.97% over the last ten years. (I do not expect diversified funds will grow at the same rate over the next ten years and can discuss that with you privately.) Mutual fund investors may have anticipated the current fall in the US dollar, which is discounting an apparently unfriendly new administration and open to better opportunities abroad. 26% of mutual fund investor assets are invested in world equity funds, which have the bulk of their investments in non-US listed companies. In addition, 17% of diversified funds are large-cap growth funds, which attribute much of their recent superior growth (+37.63% in the last 12 months) to investments in multinationals and foreign stocks. 
• Some portfolio managers are getting worried about the price of growth funds, demonstrated by the following quote from a Chinese portfolio manager in Singapore. “We believe the market is due for a meaningful correction as the pandemic worsens in the winter and fiscal stimulus may be slow and not generous. Valuation is also no longer as attractive, especially for growth stocks. We are selectively taking profits on some of our stocks and deploying the money into more decently valued stocks such as Chinese banks.”

Guidance 

I do not expect to pick the exact high in the US market, but I’m also extremely conscious that staying fully invested in well chosen funds and stocks has proven to be very beneficial in the long run. However, either due to extremely high prices, expensive stock acquisitions, or generous cash deals, accounts have somewhat involuntarily generated cash balances. Currently, my suggestion is to resist momentum by not reinvesting in the equity markets, as investors already have substantial amounts invested. When the lower-priced market almost certainly appears, it will be a good time to add to existing holdings or better investments.

Annual Market Research Visit to The Mall at Short Hills

My visit to a very high-end mall on a rainy Saturday, which later changed to a sunny day, brought out a medium-sized crowd. In some store’s, salespeople were waiting for walk-ins; however, at some high-end stores there were lines outside. There were still some vacant sites. Brooks Brothers had reopened, although it is still in bankruptcy and has some limits regarding merchandise. Shoppers at best we are carrying two medium size shopping bags. The best measure of the pulling power of brands were the three computer stores in the mall. Apple* had lines around the corner, Verizon with a smaller space had a few people waiting to be admitted, and AT&T had a large space with very few people inside. My conclusions: strong brands will have a reasonable to good Christmas season and some will scrape by on heavily discounted January sales, with a number of liquidations likely.   

* (Owned in personal accounts)

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

https://mikelipper.blogspot.com/2020/11/mike-lippers-monday-morning-musings_29.html

https://mikelipper.blogspot.com/2020/11/approaching-multiple-turning-points.html

https://mikelipper.blogspot.com/2020/11/mike-lippers-monday-morning-musings_15.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 - 2020

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.

Changing Investment Directions-Different Views - Weekly Blog # 642

 

Mike Lipper’s Monday Morning Musings

Changing Investment Directions-Different Views

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

August Calls

Market analysts have frequently identified August as a month of change in market direction. During a period of normally low volume, a little extra volume in the face of vacations can have a disproportionate impact. In addition, August usually firms up detailed plans for the highest grossing 4th quarter, while preliminary plans for the next calendar year are being finalized prior to final approval. (But we are not living under normal conditions. Thus, I believe it would be wise to adopt a “fan approach” to planning, with at least a high, low and middle ground, to prepare for the probability that there will be rapid changes that require action.)

Because of my professional life experience I start each analysis looking through the mutual fund industry data, which is often a useful clue to both markets and the broader economy. For the week that ended last Thursday night, “Value Funds” gained +2.25% on a weighted average basis. This compares with a tiny loss of -0.02% for the similarly weighted average for “Growth Funds”. Most often the investment trends that occur within the US market also occur in the international markets and this week it was true for both the international funds registered with the SEC and the “offshore” funds we track. Nine value funds were in the 25-best performing mutual funds for the week. Also on that list were five financial sector funds. Overall, financial sector funds gained +3.08%, with industrial sector funds doing slightly better +3.10%. The prior leading sector groupings declined, Science & Technology -1.56% and Global Science & Tech -1.45%. 

While a few weeks of performance does not guaranty a longer-term trend, all longer trends start with a few observations. The stock price moves of value vs. growth are way ahead of changes in the direction of earnings, although they are in parallel with many views expressed by politicians around the world.

China Pulling Ahead

Despite the rising level of tensions between the US and China, it appears on the surface that the trends within China are improving. One of the ways I follow what is happening in China is by reading the research provided by the fund management group, Matthews Asia. The following brief points were derived from their research.

• There were no COVID deaths in China in the first 12 days of August.
• Auto sales are improving on a broad scale in China, particularly for foreign brands. In July, Toyota increased +19.1 % (including Lexus +38.6%), Honda +19.1%, Nissan +11.6%. General Motors sold more cars in China than in the US.
• Last year, 60% of China’s GDP growth came from internal consumption, with only 17% of GDP being gross exports and only 17% of that going to the US. While the US and most of the rest of the world have problems with the policies and activities of the Chinese, we cannot realistically isolate them. We need to come to some accommodation with them for us all to grow.

The “Sage of Omaha” Throws Curves

Warren Buffett for many years threw out the first pitch for the local baseball team. In the second quarter of 2020 he threw a curve ball to investors with his second quarter transactions. Even if our clients or personal accounts did not own shares in Berkshire Hathaway, we would still study the company’s financials and/or pronouncements. I have suggested that a well-constructed financial and business graduate course could be conducted using only their documents. Their successes are legendary, but their few errors are even more valuable as teaching moments. Last week they published their 10-Q report and their second quarter publicly traded securities portfolio with the SEC. Each is worthy of detailed study.

The 10-Q reveals that the company should not be compared to either an open-end or closed-end fund, as it is intelligently leveraged with borrowed money in the form of debt and potential future payments, using customer float and future tax payments. Offsetting the leverage are large amounts of short-term US Treasury bills and other high-quality fixed income/cash holdings. The company is an investment portfolio of publicly traded and private equity holdings that utilize excess earnings for operational needs to buy new investments. It does not currently pay cash dividends, as shareholders benefit from the increase in value of their holdings. Recently, they have become a relatively small buyer of their own stock. Unlike many corporate CEOs and Portfolio Managers, Warren Buffett and Charlie Munger’s time horizon is that of their shareholders’ heirs. Thus, any large- scale disposal of assets comes as a surprise.

The publication of their report to the SEC of their publicly traded securities transactions in the second quarter was a surprise. In summary, they materially reduced their holdings in most bank stocks, although the report did not provide an explanation as to why. Earlier in the year they did provide an explanation as to why they sold out of all their airline stocks. They felt that it would be a period of years, not months, before air travel returned to 2019 levels. Without an explanation from “The Sage”, I am searching for one and have come up with two possibilities:

• The results for the first quarter were depressing and that got to him. (I use the singular, as the size and long-term holding period suggests that this was the curve ball pitcher himself making the primary decision.) Many felt that way, including a very long trail of the AAII weekly sample survey.
• While the political inclination of Mr. Buffett tends to lean toward the Democrats, he may have been worried about Berkshire’s huge position in the financial services sector. The thought that a specific senator from Massachusetts might be Treasury Secretary could well be scary. 

I have great respect for Warren Buffett and even more for Charlie Munger and have learned a lot from them. They have also enriched our clients and personal accounts. The only thing I promise to our accounts is that I will be wrong from time to time. Hopefully, I won’t take too long to recognize my mistake and correct it.  Nevertheless, I am not reducing our exposure to the financial sector at the moment, as with rare exception their stock prices do not reflect their earnings power in normal times. (A lesson I learned from the great John Neff.) I will admit that branches will have to be converted or closed. Quite possibly, lenders will be required to have equity in their borrowers, or similar socially driven radical changes. Governments and societies are unlikely to function successfully without a viable financial sector.

Question of the Week: What are your thoughts?

    

   

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

https://mikelipper.blogspot.com/2020/08/rotating-leadership-likely-on-horizon.html

https://mikelipper.blogspot.com/2020/08/more-to-learn-by-seeing-more-weekly.html

https://mikelipper.blogspot.com/2020/07/mike-lippers-monday-morning-musings.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 - 2018

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.

Lazy Summer, a Good Time to Change Thinking - Weekly Blog # 639

Mike Lipper’s Monday Morning Musings

Lazy Summer, a Good Time to Change Thinking

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

In the northern hemisphere summers often usher in the most enjoyable part of the year, with time to recuperate from winter’s focus on survival. In our trading/investing world, the summer is often a period of relatively low transaction volume combined with a lot of vacations. We contrarians scan for changes, while the majority shift their attention elsewhere. The old quote given to planners captures our anxiety “if everything seems to be going well, you have obviously overlooked something”. While I cannot predict the future, I know that recognizing change early is highly productive in making money and or avoiding significant loses.

Stock Market Leadership is Changing
Following on last week’s blog which sensed that some change is occurring, I looked at the weekly performance of 103 mutual fund investment objective peer groups. Using fund performance data from my old firm, year to date through Thursday there were only 27 peer groups rising more than the +1.04% gain for the average S&P 500 index fund. However, for the week there were 84 peer groups that beat the Index Fund’s gain of 0.64%. Clearly, we have gone from a minority of peer group averages lagging, to a majority doing better. What is happening?

Perhaps the individual fund peer group performances give us a clue. The average Large-Cap Growth fund gained +14.90% year to date but only rose +0.61% for the week, trailing ever so slightly the +0.64% gain for the S&P 500 Index funds. Their significant overweight in technology was not likely the cause, as the Science & Technology funds average gained +1.53% and Global Science & Tech funds gained an even higher +1.87%. I suggest that while Large-Cap Growth Funds had an oversized position in tech, they did it in relatively few stocks compared to the more diversified sector funds. Thus, the problem may well have been in an over commitment to a dozen or so big tech holdings. Another possibility could be how the average Large-Cap Growth Fund handles its substantial flow of new money, which came in after good relative performance. To keep the number of holdings in the portfolio manageable, managers bought more of what they owned, as they by definition were the most liquid stocks in the market. Furthermore, an army of analysts were predicting a continuation of good earnings in these trying times. This coming week we will see whether the rosy estimates were close to being correct.

There is another way to look at the evolving change in market leadership.

• Some “value” funds and a significant number of sector funds are doing better than the S&P 500 Index, which is market-capitalization weighted.
• Many currencies are doing better than the US dollar, leading to weekly gains of +2.19% for Global Sector funds and +1.68% gains for World Equity funds. There are a number of explanations for these market trends:
• Numerous countries are apparently dealing with COVID-19 better than we are, with the economies of both Europe and China doing better. 
• The US stock market has become extremely bifurcated, with perhaps 10% of the stocks contributing to most of the indices’ gains. If most of the market does not catch up, there is a question as to how much longer this rising market can last.
• The current political campaign is depressing. The views of various candidates are reducing enthusiasm for their positions, both among their followers and the relatively limited number of independent thinkers. 
• There is little belief that the US is likely to have good times immediately ahead, partially due to our debt burden at all levels of society. 
• Without an expanding real economy, we are likely to see an increasing number of business and personal financial failures. 

What to Do?

1. The first thing many investors need to do is switch their primary interest from security selection to portfolio allocation, including available cash for investment. 
2. Create or update a schedule of likely cash withdrawals.
3. Organize the portfolio and identify holdings according to your current thinking, e.g. relative current risk, assets that are hedges or are held to address specific concerns, comfort levels, any other way that might drive decision making.
4. Array your assets in each of the above buckets and see if the allocation is appropriate.
5. In this lazy summer season and probably before mid-August, focus on your largest allocation and reduce the biggest allocation bucket by 10%. This will increase your flexibility to reinvest opportunistically.
6. Keep reducing excessive allocations by 10% quarterly until comfortable.
7. Begin increasing your discomfort by making new investments with specific goals in mind. 
8. Identify review points, either on a calendar basis or when a structural event occurs, either within your account or the security’s own development. 

If you need help or disagree with this type of thinking contact me.


 
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/07/that-was-week-that-was-change-weekly.html

https://mikelipper.blogspot.com/2020/07/currently-selling-more-important-than.html

https://mikelipper.blogspot.com/2020/07/july-4th-lesson-need-to-hire-wise-not.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 - 2018

A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.

Critical Time for Critical Questions - Weekly Blog # 518

Introduction

Critical Time

For the US stock market, we may be at a critical time or juncture leading to materially higher or lower stock prices. Are we pausing in a correction or are we on the way to a full bear market of about twice the decline already experienced, or worse? Are we in the process of successfully testing the February bottom?

To me, as both an analyst/portfolio manager and a handicapper trained contrarian, I think the odds are good for the first, but not the second. To me, as an observer at the  race track, favorites typically win about a third of the time. I look at sentiment readings and the mainstream media for clues. Given three choices, bullish, bearish, and neutral, the latest weekly survey sample of the American Association of Individual Investors (AAII) has pushed the bearish button to being a slight leader. Normally, most investors are bullish most of the time. Their views are being reinforced or led by large elements of the coastal media who are proclaiming the market slide as confirmation of the supposed failures of President Trump.

Using my training as a racetrack handicapper, I suggest the odds we are experiencing a successful test is better than 60%. Those odds are in the same neighborhood as investors’ own various mutual funds which are 67.74% in equity funds. (Strange how the 2/3 to 1/3 split is similar to the standard attack format for successful battles won by the US Marines.)

As focused as most investors are on the next general direction for the market, the key is not the tactical direction, but the answers to long-term strategic questions. Just as at the track, the key to walking away a winner in dollars is how one handles the betting money. The key to being a winning investor is reasonably answering the following strategic questions.

Critical Questions

The single most important question (usually not answered) occurs when someone asks for a stock recommendation. Until a stock is no longer trading, history suggests that it will have a plus sign in terms of its performance for some period. Thus, it is not whether this stock will rise in price, but whether it will rise over a pre-designated time span. Just as it is a mistake to bet on every race during your day at the track, it is also a mistake to have a single portfolio that one believes will be a winner for the current, intermediate, and long-term. This is particularly true today, with half the stocks disappearing over the last twenty years or so.

We have been an advocate for dividing institutional and individual portfolios into separate time-span portfolios. Different securities are likely to dominate the short-term or Operational Portfolio, Intermediate or Replenishment Portfolio, longer term Endowment Portfolio and the beyond the control of the current investor Legacy Portfolio. I would be pleased to work with subscribers to construct these portfolios. The following are not recommendations but illustrations as to what we would be looking for in the candidates:

• Short term/operational Portfolio - mutual funds with a balance of short-term high quality fixed income and high quality liquid stocks
• Intermediate/replenishment Portfolio - medium price/earnings ratio stocks paying average dividends
• Longer-term/endowment Portfolio - mutual funds of established growth companies with high return on tangible assets and p/e no more than 150% of market
• Legacy Portfolio -  funds or companies that look to the next generation of leadership e.g. Berkshire Hathaway*

*Held in client and personal portfolios

One of the most difficult questions to deal with is the measurement of success. To the extent that a portfolio is meant to produce capital (principal, income or total return), the clearest measure is absolute return. If there is a competitive need to be fulfilled, then an external index or indices are needed. (University endowments are in competition to get the best faculty and foundations are in competition to get grants.) The critical key in choosing a measuring rod is how the index is constructed and changed, the rigor of measurement, data availability, and whether the proposed portfolio will be restricted to elements within the index. I have a bias in favor of using mutual fund indices and averages when they qualify. Some of the areas they cover include market capitalization, growth, value, and core, world equity and debt, sector funds, mixed asset funds, various types of bond and credit funds, and different types of money market vehicles.

Be very careful not to lump conventional mutual funds in with Exchange Traded Products (Funds and Notes). While both are registered under the Investment Company Act of 1940, they are designed and largely used differently than the larger universe of conventional mutual funds. Exchange Traded Products do not have cash to buffer market price changes and flows, they have relatively fixed portfolios and are primarily used to express specific long or short points of view. The bulk of their volatile flows come from trading organizations or advisors who trade their accounts. Recently, they have not been particularly good at handling these difficult markets. According to The Wall Street Journal which tracked the price performance of 72 stock indexes last week, including currencies, commodities and ETFs, there were no ETFs in the top 21 or bottom 27 slots. This suggests to me is that the market is reconstructing the winning and losing groups.

The purpose of comparing performances of various instruments is to create awareness of what is going on and to manage expectations. The result of measurement leads to an understanding as to what portion of one’s portfolio is for investment or speculative purposes. The answer is not always found in the nature of the instruments, but how and why the owner uses them. The market needs both investors and speculators as they often trade with each other to enlarge or reduce their universe. The changes in the value of investments and speculative vehicles are dependent on these trades. Market prices don’t generally move a lot unless investors are selling to speculators or the reverse. For example, during periods of high price momentum, with the exception of scale orders to enlarge or reduce the size of a position, wise investors should leave the action to the speculators.

Questions of the Week:

How many, if any, sub portfolios do you use?
What is the ratio in your own account of investments to speculations?
__________
Did you miss my blog last week?  Click here to read.

Did someone forward you this blog?  To receive Mike Lipper’s Blog each Monday morning, please subscribe using the email feed buttons in the left margin of Mikelipper.Blogspot.com or by emailing me directly at Mikelipper@Lipperadvising.com

Copyright © 2008 - 2018

A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.

“The Risk to Worry About” - Weekly Blog # 517.

Introduction

Recently I ran into an old friend at a cocktail party who is retired from being the managing editor of a trade newspaper. He expressed concern as to his own investments with the current volatility. I suggested that the time he should have been worrying about risk was during the fourteen months ending in January, after nine years of rising markets! He was much more comfortable with gradual gains and no declines greater than 3%. I said he should have been worried about risk when others were not, which is perhaps the best measure of the reciprocal level of certainty that a large number of pundits proclaim.

You never know about the future, but one can guess what you don’t know. While in the US Marines as an officer, we were instructed when planning for an operation to identify the essential elements of information (EEI). We quickly learned that it was rare to have as much as 70% of the EEI. Applying the same approach to handicapping at the racetrack, I was pleased to find 60% of the EEI. I feel the same today when selecting individual stocks and funds.

I suggest that in each of our attempts to measure risk, the largest single risk is the unknown and it rises when the pundits are more certain.

Is the Public Smarter?

“Americans Hold Off on Spending Extra Tax Dollars” was a page 2 headline in The Wall Street Journal on Friday. In addition, February was the third month that overall retail sales were slightly off from prior months. Consumer spending was up +0.2% compared to a rise in wages of +0.4%. This was not what was expected. I cheered this announcement as it demonstrates consumers are acting rationally. In the end, the article did point out that a number of consumers were using their tax benefit dollars to reduce their high interest loans. (Economists would label this as savings or deferred spending.) 

Consumers should be fearful of increased state and local taxes as well as increased fees paid to government agencies, and for business sales/use taxes. They should be saving and investing to reduce their growing retirement capital deficit. I don’t know whether it has yet entered into the public’s psyche that there is a chance that the purchase prices of their items will bear the costs mentioned and possibly the impact of tariffs.

A Second Example of Consumer Smarts

For the last several years American investors have been net buyers of “non-domestic equity funds.” I am guessing that these buyers are not largely the same fund investors that have been redeeming older domestic equity funds. I believe the redeemers are completing their expected retirement, estate building, and large purchase needs. To the extent that older fund investors are adding foreign stock investments, they are hedging their domestic equity funds. For a number of years the US dollar has been weak compared with other currencies and deservedly so. Despite foreign investors buying US securities for refuge, it makes sense for US investors to invest overseas. Often there are lower valuations in local markets, which makes sense when considering they are also in less liquid markets. They are also unique investments not found within US borders.

Traders are also buying more overseas investments while redeeming domestic ones. Each week my old firm, now a part of Thomson Reuters, measures the net flows of both conventional mutual funds and Exchange Traded Funds and Exchange Traded Notes. For the last week, ending on Wednesday, ETFs had net redemptions of $11.5 Billion in domestic equity vehicles while conventional mutual funds had $2.5 Billion. (Remember the assets of ETFs are much smaller than conventional mutual funds.) It is worth noting that just two ETFs had combined net redemptions of $10.6 Billion in S&P 500 invested portfolios. This suggests to me that the redemptions came from a small group of trading desks and not the general public.

The fallacy of the “risk on/risk off” approach

The financial media has gotten into the habit of describing market movements as either “risk on” or “risk off.” This is simplistic but can be a binary switch for a quantitative portfolio. It assumes that the investor has identified the risks. Perhaps, this in and of itself is a big risk.  Many can produce a roster of risks. Few can weight them. Fewer still can set the time when their impact will be felt.

The fallacy of the “risk on/ risk off” approach is that it is one directional. At all times we should be looking at both the opportunity for risk and reward. In this case those that invest in mutual funds have an advantage over those that use only individual securities. Mutual funds have flows that many individual investments don’t have. Flows drive buy and sell reactions which cause the portfolio to change. (Often a fund in net redemption benefits from pruning the least attractive current holdings and has an additional opportunity to switch into new investments.) 

Regardless of how one’s portfolio is structured, you should always be looking to add opportunity.

Quotes from Berkshire Hathaway’s Annual Report*

While Warren Buffet lays out their thinking about acquisitions of companies, the principles can be applied to selected individual stocks.

•     good returns on net tangible assets and a sensible price

•   “We evaluate acquisitions on an all-equity basis.”

•  “Betting on people can sometimes be more certain than betting on       physical assets” (I would include shown financial assets.)

•  Berkshire’s goal is to substantially increase the earnings of the non-insurance group through a large acquisition.

•   Berkshire has suffered four short-term price declines of 59.1%, 37.1%, 48.9% and 50.7%.

•  “An unsettled mind will not make good decisions.”

• “Charlie and I will focus on investments and capital allocation.”

Perhaps the single most important clue to Berkshire Hathaway’s long-term thinking is the following statement:

• “The Yahoo broadcast of the meetings and interviews will be translated simultaneously into Mandarin.”

*Held in client and personal portfolios

Question of the Week: What are the risks to your portfolio that others don’t see?

__________

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

Did someone forward you this blog?  To receive Mike Lipper’s Blog each Monday morning, please subscribe using the email feed buttons in the left margin of Mikelipper.Blogspot.com or by emailing me directly at Mikelipper@Lipperadvising.com

Copyright © 2008 - 2018

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.

Individual Investors Should Worry Professionals

Introduction

When I became a professional securities analyst in the 1960s there was a trend to have two separate research and marketing efforts of brokerage firms. A traditional effort to serve individual investors was joined by a second, and higher paid effort to serve institutional investors. Around the cyclical movements of the stock market, individuals and institutions invested differently and each fed off the other's transactions. Institutions were able to buy what they thought were cheap stocks from supposedly unsophisticated individual owners and sell into them when individuals were not well enough informed. Interesting this dichotomy did not work to the disadvantage of the individual investors as much as it may have seemed. Individual investors were not only net buyers, but for the most part long-term investors that often facilitated the more rapid turnover of the so-called professional investors.

This relationship is no longer the case. Because of the decision of the US government to introduce price competition in brokerage commissions (which led to a price war) the profitability of directly serving the individual long-term investor declined meaningfully. Today try to get a “full service” retail brokerage representative to be interested in opening an account to handle the sporadic purchase of a hundred shares of a NYSE traded securities. If the broker can’t get the customer to open a margin account, buy new issues, trade over-the -counter securities or place decision making judgment in a managed account or a packaged product or possibly an automated relationship with a call center, chances are he/she will not be interested in the relationship with the perspective customer. Only the alternatives just suggested are profitable for the firm and the individual broker. Thus relatively few individuals are directly active in today’s stock market. They are investors through their employers’ defined contribution plans, land stock purchase plans, and or mutual funds/variable annuities or in some cases stock options.

The plain truth on most days, particularly in the summer months, almost all the transactions come through various institutional channels. The market has become largely a game of professionals competing against each other for research and trades. In some respects the market has become more susceptible to sudden volatility within the trading day as the professionals in this interconnected world react to each incremental research element and price change. Thus, a different sort of market analysis is required to avoid being at a competitive disadvantage.

The Players

Exchange-Traded Funds (ETFs), and Exchange Traded Notes (ETNs), while relative small in terms of assets as compared with other institutions,  are selectively quite large in the intra-day markets. While the regulators believed that when they permitted the creation of these vehicles in the US and a number of other markets, that individual investors would benefit from their low cost and trading efficiency, they really created trading vehicles for fast trading professional investors including hedge funds, market makers, managed accounts of investment advisors, central banks (Tokyo), and other institutional players.

In many weeks the aggregate net transactions in ETFs is larger than those of conventional mutual funds, even though their assets are less than half of the assets of mutual funds. While there are thousands of ETF transactions in a given week, the vast majority of transactions are in a couple of products that professionals are using to invest or hedge with or without margin type leverage. According to my old firm, Lipper, Inc., for the week ending Wednesday there was $6.7 Billion in net purchases of equity ETFs; $4.4 Billion went into PowerShares QQQ Trust EFI, invested in the 100 largest NASDAQ stocks, and $1.2 Billion into the iShares Core MSCI EAFE Index fund or about 5.65% of that fund’s total net assets. This left approximately $100 million for net purchases of all other equity ETFs.

A similar pattern was present on the taxable fixed income side which had total net purchases in the week of $1.2 Billion, with $1.1 Billion into two funds, iShares 20+Year Treasury Bond ETF, and iShares Core Total U.S. Bond Market ETF.

All four of these funds could be used to fulfill the short-term trading needs of institutions. To get a feel as to how important the trading is in these products, one should look at the extreme volatility of the major stock and bond indices in the last ten minutes of a trading day as the Authorized Participants (APs) try to even up their trading books. On some days in the last few minutes the stock indices can move close to 1/3 of the daily price moves for the whole day up to 3:30. Sometimes some of the transactions in ETFs are on the short side. In October of 2016 the size of the short interest was at a record level on the SPDR S&P500 ETF. Currently it is at the lowest level in more than a year. Obviously some trading institutions were shorting due to their views on the US Election. They may have viewed this as a hedge against some long positions or it could have not been paired against other holdings.

Mutual Funds are Evolving

There is also something happening in conventional mutual fund transactions. Despite a current period of relatively good fund performance, funds are experiencing net redemptions. A careful analysis will reveal that this is not a signal of disappointment. Most of the redemptions are coming out of the Large Cap Growth and Growth and Income funds that were the major receivers of decades of inflows driven by commissioned sales people. The basic investment pitch to potential owners of funds was to provide retirement capital and to a lesser degree educational funding. On an actuarial basis a good bit of these redemptions are completions fulfilling their intended purposes. In prior decades we would not have seen net redemptions because the normal completions would have been offset by new sales of funds, except selling funds to individuals is far less profitable than it has been in part because the sale freezes the money in place for a number of years due to anti-churning rules and commissions on funds are no longer the highest level available to the salesperson.

There is another important trend that takes mutual fund dollars out of the US marketplace. While domestic funds in the week had net redemptions of $4.6 Billion, non- domestic funds had net sales of $2.6 Billion. This is understandable on two levels. The Financial Times data shows that there are eighteen national stock markets it tracks. Eight had gains of between twenty and twenty-six percent and only one of these (NASDAQ) was in the US. The IMF is forecasting only India and China will have GDP gains of more than 5%.

Chart Readers

All three of the major US stock market indices, Dow Jones Industrial Average, Standard & Poor's 500, and the NASDAQ composite started last week with a price upward gap. Often price gaps get filled before a major move occurs. In addition the NASDAQ composite daily price chart shows a reversal pattern called a “Head & Shoulders” which might be predicting a decline. As part of the market’s function to promote humility, this index is now rising near its former peak. The technical market analysts at Merrill Lynch stated that if the index breaks out on the upside it would be a failed Head & Shoulder pattern that is quite bullish. As usual there is an “on the other side” market research team at Charles Schwab that suggests that we should be prepared for a summer pull back.

Investment Conclusions

One of the reasons I came up with the TIMESPAN Lipper Portfolios® is to address this kind of situation, The second of the two portfolios, the Replenishment Portfolio, has a function of replenishing the Operating Portfolio which is designed to meet payment needs near term, or about  two years. The Replenishment Portfolio expects that over a market cycle it will be called to replenish the operating funds. This assumes that over a cycle (which typically takes four to seven years) there will be at least one down market. With this in mind Replenishment Portfolios should be examining their liquidity positions . This will be easier if they are in open end mutual funds that are not expected to “gate” or temporarily restrict redemptions in cash. In some cases large redemptions will be met with in-kind transfers. In most cases the transferred securities will be relatively easily sold.

The other two portfolios, Endowment and Legacy should not be disturbed. However if there was a serious decline one might want to switch. My data and consulting client, the late and great Sir John Templeton instructed to switch into better bargains when available.

__________

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

Did someone forward you this blog?  To receive Mike Lipper’s Blog each Monday morning, please subscribe using the email or RSS feed buttons in the left margin of Mikelipper.Blogspot.com

Copyright ©  2008 - 2017

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.