Showing posts with label Mutual funds. Show all posts
Showing posts with label Mutual funds. Show all posts

Sunday, December 29, 2024

A Different Year End Blog: Looking Forward - Weekly Blog # 869

 

 

 

Mike Lipper’s Monday Morning Musings

 

A Different Year End Blog: Looking Forward

 

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

 

 

 

Using Mutual Fund Data for Other Investors

Mutual Funds reveal their investment performance to the public every trading day and reveal their portfolios quarterly. In many cases the funds are managed by large investment managers responsible for other accounts. Their portfolios by implication reveal some of their philosophy of investing for other accounts.

 

Each week the London Stock Exchange Group publishes fund data that I used to produce. The report tracks 103 equity fund or equity related fund peer groups. Using the last five years of data, the shortest time period one should use in assessing investment performance, only 17 peer groups beat the +14.58% five-year return of the average S&P 500 index. (In selecting funds, I prefer to use 10 years.) There were three peer groups that did better than the S&P 500 Funds Index:

  • Science & Technology +17.72 %
  • Large-Cap Growth +16.62%
  • Energy MLP +14.64%

Remember these are averages, so within the peer group some funds did better or worse than their group average. With only 16.5% of the groups beating the index, I question whether we are preparing a base for a meaningful general stock market advance.

 

Current Structure of the Market

The last four trading days of last week may not be significant but could be. The next two trading days will probably be dominated by last-minute tax-oriented transactions initiated by market makers or late players.

 

In the last four days 49.4% of the shares on the NYSE rose, while 55.8% rose on the NASDAQ. The more bullish NASDAQ players generated 205 new highs, compared to only 73 on the NYSE. Investors participating in the weekly AAII sample survey have been moving toward neutral in the last three weeks. Three weeks ago, the Bulls represented 43.9%, but they only represent 37.5% in the current week. The Bears only increased by 2.4% to 34.1%.

 

Possible Longer-Term Signals

Both political parties feel they should direct the private sector to a much greater degree than in the past. The latest example of this is the FDIC, which has wrung an agreement from the NASDAQ to limit the amount of ownership in small and regional banks. This a long echo of the “Money Panic of 1907” that Mr. Morgan solved in his locked library, which led to the creation of the Federal Reserve. A generation later the US government realized the Fed couldn’t help local farmers, their banks, and suppliers, so they passed the Smoot Hawley tariff bill, which was reluctantly signed by President Hoover.

 

Both the good and bad leaders of many countries recognize that the US has not won a war since WWII. Consequently, the growth of China in many fields is disturbing. Tariffs may protect some US businesses at a huge cost to lower income consumers and eventually isolate the US from growing markets, diminishing our military strength.

 

These issues and others are what we will be dealing with in the new cycle we have entered.

 

We wish you, your family, and friends a healthy, happy, and prosperous New Year.

 

 

 

 

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

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

Mike Lipper's Blog: It Doesn’t Feel Like a Bull Market - Weekly Blog # 866



 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

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Sunday, December 22, 2024

Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

 

 

 

Mike Lipper’s Monday Morning Musings

 

Three Rs + Beginnings of a New Cycle

 

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

 

 

 

Three Rs Describe the Week

The first part of the week in terms of transaction volume on the NYSE + NASDAQ looked somewhat normal, but by midafternoon the world changed. We got the expected ¼ percent cut in Fed interest rates. However, during the press conference Jerome Powell stipulated his lack of confidence in the intermediate future outlook for Fed actions. As the conference went on, selling accelerated. By the closing bell many stocks had fallen, then some fell between 3-5% or more in the after-market. Interestingly, Thursday saw little movement. Trading volume for the first four days of the week was 4.72 million shares. On Friday there was news of one indicator showing inflation likely to decline, which was greeted with 8.13 million shares traded mostly on rising prices.

 

This was the first R, demonstrating the trader’s recalibration of inflation estimates, showing particular strength in techs and high-quality bond prices crunching.

 

The second R saw a further breakdown in the reversal chart pattern of the DJIA and DJTA. (Chart reading is an artform and is not accurate all the time.)

 

The third R, the need to deal with reconciliation of the budget, was perhaps the most significant and became known on Saturday. The final votes in favor were impressive. The House voted 366 to 34 in favor and the Senate 85 to 11. This proved my earlier view that there was no real landslide for President Trump. The American people don’t want much legislation or many executive orders.

 

What Does This Mean?

We live in a world where:

  • Most governments are tolerated or downright unpopular.
  • Technology appears to create more problems.
  • People are afraid of both political and corporate leadership.
  • The education sector can’t even run its own campuses safely. They are producing unemployable and over-privileged people only ready for “C-suites”.
  • Hard science is not providing much help for the soft science needs of the population.

 

Several examples of not understanding labels hit me this week, emerging markets and large global companies dominated by the five largest firms. The largest firms are attractive because they are exporters to large markets. Thus, to be successful one must be global.

 

Another example is the published list of the 15 best and worst mutual funds. If you are a large investor, the list is misleading. Of the best performing funds, 13 funds were from large fund families, whereas only 6 funds were from large fund families on the worst funds list.

 

Even with AI people need to think more thoroughly.

 

Please suggest what you think the next cycle will look like. 

 

 

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

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

Mike Lipper's Blog: It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

Mike Lipper's Blog: Professional Worry Time vs Amateurs’ - Weekly Blog # 865



 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

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Sunday, December 15, 2024

Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

 

 

 

Mike Lipper’s Monday Morning Musings

 

Confessions & Confusion of a “Numbers Nerd”

 

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

 

 

 

Numbers Tell The Story

 My education at Columbia University, the USMC, and taking the CFA taught me that numbers tell the story. My brother and I created a company that sold mutual fund data for some of the largest fund organizations in the world. The problem is it was the wrong story. I fell into a trap common on the numbers loving Wall Street.  The trap is using numbers as a tool for many applications for which they were not intended.

 

The original sin was using the changing price level to make investment decisions, +10% or -8%. This leads to being happy with +10% and unhappy with -8%. Raw numbers can be misleading, until you understand the usage of numbers and their appropriate comparison.

 

Early in my career I called on the partner and treasurer of a management company who informed me he didn’t need our service because he had found something better. I asked to see this remarkable comparison. He showed the performance of all funds, regardless of mission, in his city! He was using the hometown comparison to set the wages of his workers. (Luckily, an outside lawyer working with the independent fund directors immediately recognized that what I was peddling would be essential for the directors.)

 

This experience brought home that there were at least two different needs in the same shop. The treasurer had an operational need to gage the competitive availability of labor needed for the fund’s work, while the lawyer wanted the directors to know how each of their funds were doing competitively.

 

Numbers in the right context are critical. An example of this is the +10% -8% example. The +10% is quite poor in a league averaging +20%, with the best at +30%. The -8% could be superior when the competitive average is -20% and the worst fund is down -30%.

 

Some psychologists believe losses are twice as painful as the pleasure of gains of similar magnitude. This probably averages out, with losses happening in one of four years in the US, but more frequently in other countries. I believe this pain level should also be addressed in terms of age. The older the individual, the less time they have to fully recover. Many of us rely on gains from investments that have been successful in the past, and our faith in them builds over time, so when they fail it is more destructive.

 

This is one of many reasons that relatively little money flowed into SEC registered “China Funds” this week, even though 13 of them were in the 25 best performing mutual funds. Small-caps pulled ahead of mid-caps for the week, which had performed better this year.

 

Before treating the above as purchase suggestions, I quote from Jaime Dimon “Past Performance is not indictive of future results.” However, I regularly look at investments that have done poorly for a long period of time.

 

Current Environment

Most democracies are unpopular and are favored by a decreasing number of supporters. Even in the US the Ex-President won a narrow victory, benefitting from a significant number of non-voting Americans.

 

With long-term productivity adjusted for inflation, higher than normal interest rates, a decline in the dollar, the near-term outlook is not good. This is perhaps the reason many smart companies are laying people off.

 

Please share your views with me, particularly when you feel I am wrong. I need your help.

 

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

Mike Lipper's Blog: It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

Mike Lipper's Blog: Professional Worry Time vs Amateurs’ - Weekly Blog # 865

Mike Lipper's Blog: SPORTS FANS SELECT CABINET & OTHER PROBLEMS - Weekly Blog # 864



 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

Saturday, November 11, 2023

How to Find the Answer - Weekly Blog # 810

 



Mike Lipper’s Monday Morning Musings

 

How to Find the Answer

 

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

 

 


First, recognize that one does not have the answer to the problem. In my case, and for most others, I do not know what the future holds for the world, our economy, the “market”, or my accounts and my investments. Second, search for a source of greater knowledge. Taking from the folklore of the racetrack, “smart money”, a guide to an advantaged decision.

 

The term smart money comes from the Damon Runyon era, when private bookmakers gave odds and took bets on horseraces. The odds that they quoted were the odds the bettor received if they happened to win. This was the traditional way of doing things in Great Britain and other places. In the US, various state governments saw a way to generate revenue from betting activities. They required the tracks to pay them a relatively small portion of the winning bets, alongside what the tracks themselves charged, for a combined total “take” of around 15% of the winnings.

 

Illegal bookmakers offered two services, taking bets over the phone and rather being forced to attend the track, running a banking operation by extending credit to the bettors. If the money bet by their customers was differently balanced than the money bet at the track, the bookies might not have enough customer money to meet the winners’ expected payments. To reduce this risk, the bookies evaluated their exposure late in the 30 minutes before each race. They then communicated to a trackside associate to bet enough money on the probable winner to reduce the likely payoff odds to an amount they could afford. The minute this balancing operation was activated, it became visible on the tote boards. Some would recognize what was happening and choose to join the so-called “smart money”. Riding on someone else’s thoughts sometimes pays off.

 

Applying the Smart Money Approach

Each week I scan both the volume of shares and how they are divided between rising or falling on the NYSE and NASDAQ. I pay particular attention to any meaningful difference between the two major marketplaces.

 

The media proclaimed this past week a rising market because the three major stock market indices rose. However, there were more shares sold at declining prices than at rising prices. The New York Stock Exchange gets more media attention than the NASDAQ because the dollar value of shares listed is larger than that on the NASDAQ. However, some of the volume on the NYSE is not as professionally managed as that on the NASDAQ market. (The NYSE has more individual investors and more institutions with smaller and less competent research staff). In the latest week, 70% of the NYSE declined vs 64% on the NASDAQ.

 

The smaller decline is likely due to more growth-oriented stocks trading on the NASDAQ. Also, the big market-cap energy companies trade on the “big board”. (In the week ended Thursday, mutual funds primarily invested in natural resources fell -5.62%, while growth stock funds gained +2.69% on average.

 

Accumulation or Distribution

Another attempt to find “Smart Money” is technical, market, or price analysis. The theory is that smart money acquires (buys) investments when they are cheap and distributes (sells) them when they are overpriced. Few investors openly declare what they are doing.

 

Many market participants can be labeled as either optimistic or pessimistic. For the most part optimists believe many of the problems facing us will be addressed successfully in the near-term, usually in under one year. They are buying because in part they believe that near-term earnings will rise. The pessimists don’t have confidence in the near-term, they believe there is still near-term risk at current stock price levels.

 

If one quickly divides most stocks into growth and value, there were two new elements revealed this week. The weekly report on US rail (freight) traffic fell 1.7% on a year over year basis. Seven out of ten types of freight declined for the week, with only three rising. Visits to various shops show that many items are no longer being carried.  Smaller in terms of direct economic impact but psychologically more important is Apple’s (*) announcement that they are raising trade-in prices for old devices, including Androids. They are doing this to aid sales of their own phones, while perhaps supplying the overseas market with cheaper phones, particularly India.

*Owned and managed and personal accounts

 

Lessons from History

There are many lessons from the Depression we continue today, such as the almost guaranteed death and debts of WWII. As a Marine I am very aware that the best and perhaps only way to achieve long-lasting peace is to prepare for war, which we are not.

 

A second lesson from someone who is older than the two leading candidates for the US Presidency is that their ages should not be the main reasons to approve their second chances. Their history as young and not so young men is enough to disqualify them. More important is that our political system allows them to be candidates which we should correct. There are many senior people older than the two “young seniors”, like Charlie Munger who could do a better job.   

 

 

 

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

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

Mike Lipper's Blog: Changing Steps - Weekly Blog # 807

 

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Sunday, July 16, 2023

Two Cycles Are Worth Watching - Weekly Blog # 793

 



Mike Lipper’s Monday Morning Musings


Two Cycles Are Worth Watching

 

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

 

 

 

Concept

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

 

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

 

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

 

First Investment Cycle

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

 

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

 

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

 

Peer Group     5-Year    10-Year    Since Trough

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

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

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

Value          +7.26%     +8.01%      +24.63% 

Growth         +8.37%    +10.06%      +20.23%

 

Observations:

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

 

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

 

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

 

Analytical Conclusion:

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

 

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

 

The Major Empire Cycle

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Two Conclusions:

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

 

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

 

 

 

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Mike Lipper's Blog: Retro, Forward, & Cycles - Weekly Blog # 792

Mike Lipper's Blog: Gravitational Waves & Investing - Weekly Blog # 791

Mike Lipper's Blog: Manageable Risk - Weekly Blog # 790

 

 

 

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Michael Lipper, CFA

 

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Sunday, April 23, 2023

Early Stages of a New Grand Cycle? - Weekly Blog # 781

 



Mike Lipper’s Monday Morning Musings


Early Stages of a New Grand Cycle?

 

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

 

 

 

Travelers Note:

Many who speak of future seminal changes don’t recognize where they are. This is understandable, as it is difficult to identify where we are in the development of trends, let alone where we are going.

 

Whether or not you agree with my perceptions, they may be useful to you in gauging where we are in the progress of time. Please share your views with me. You can’t avoid thinking about the future if you invest in securities. But by not investing at all you are letting others decide you and your family’s fate. No investment isn’t an investment.

 

Reliance on History

The main tool we have in thinking about the future is our perception about our collective past. We selectively use our less than completely accurate perceptions of the past in projecting our futures. While our learned or experienced views of the future can be helpful, they won’t give us a completely accurate map of the future.

 

The worst remembrance that some seniors have is a period labeled the “Great Depression”. In thinking about the future, my analytical training suggests that this is a useful model for the worst that might befall us. We hope we can survive a similar period and therefore we can deal with whatever may come.

 

Where are We?

Remember this question when traveling with young children? We may remember a partially inaccurate statement from a nearby authority-figure making a guess. This was not an attempt to misinform, but a quick estimation of what was known or believed. We do the same today in addressing the future, using a selection of factoids that lead to a satisfactory conclusion. I follow this learned pattern.

 

When I look at the array of information before us today, the following elements are part of my thinking:

  • The best single predictor of the future by a mass of decision-making people is the general price trend in various US markets, utilizing the median performance of US Diversified Equity  Funds (USDEF). Measuring from the peak on 2/19/20 to last Thursday, there was a compound gain of +5.93%. (True, from a subsequent bottom on 3/23/20 the gain was +23.31%.) However, for the last 2 years the average USDEF lost -1.14%. These are pretax and pre-inflationary returns. Obviously, retirement capital during this period was not augmented by positive real performance. For the last 52 weeks, results were even worse -6.59%. In the current year through Thursday, 7 out of 108 fund peer groups lost money, with the same number gaining over +10%. I am guessing the median fund probably produced about +5%, adding little to retirement accounts after taxes and inflation.
  • Perhaps the most depressing news came over the weekend in a NY Times column titled “Why Money Market Funds are now Leading the Pack”. They are referring to money funds attracting more assets than any other type of fund. This is typical of a bottom, which comes at the end of investment cycle before a new cycle begins.
  • These two elements suggest a lot of investors, both individual and institutional, expect a lengthy period of stagflation. We have had two extended periods of stagflation, during the depression and during portions of the 1970s and 1980s.
  • Today we are seeing two types of behaviors we saw during the Depression.
    • Empty apartments or floors being temporarily used for parties or other short-term uses.
    • Broadway shows picturing past happier times.
  • Last week 8.8% of NASDAQ listed stocks hit new lows vs. 2.9% for the NYSE. The NASDAQ led the NYSE on the way up and is still up +17.15% year to date. We should consequently expect it to lead going down.
  • There are another two Depression era trends currently reappearing. A speed up in the replacement of CEOs and new ways of doing business. Apple* is an example of the latter. They are offering a cash savings account, not an insured deposit relationship. During the Depression, FDR started the FDIC to protect the bank assets of small depositors. While most people thought the accounts were backed directly by the government, losses were socialized by the remaining banks when the FDIC bailed out the banks. (This privatized the loss in the same way JP Morgan did in the 1907 Trust company panic.) Apple’s current move is backed by Apple, the largest company by US market capitalization. 

*Shares in Apple and Berkshire Hathaway are owned in personal and client accounts. Apple shares are the largest public investment owned by Berkshire Hathaway.

  • Inflation is caused by excess demand not being consumed by the domestic economy. Throughout history wars have contributed to inflation, as the government spends money not supplied by the domestic economy. Spending on climate change, poverty, and similar expenditures also add to inflation. Short-term interest rates only directly impact short-term borrowing, having only a modest impact on national inflation.

 

Working Conclusion

While it is not absolutely certain we will have a major economic decline, it shouldn’t be discounted.

 

After depressions there is always an expansion to look forward to.

 

Thoughts?

 

 

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Mike Lipper's Blog: Pre, Premature Wish - Weekly Blog # 780

Mike Lipper's Blog: 3 PROBLEM TOPICS: Current Market, Portfolios, and Ukraine- Weekly Blog # 779

Mike Lipper's Blog: What To Believe? - Weekly Blog # 778

 

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

Sunday, November 6, 2022

Are You Getting Value from Numbers? - Weekly Blog # 758

 




Mike Lipper’s Monday Morning Musings


Are You Getting Value from Numbers?


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

            

 

  

Investors tend to be number hogs. They trust that the numbers they see represent reality, which sometimes they do. Most of the time investment solutions start and end with some form of equation.

 

We would be better off if we started and ended our analyses with qualitative descriptions. These could capture our depth of thinking on the topic and clue us into our weighting philosophy.

 

 If we can’t immediately use a numerical relationship, we tend to discard it. It would be more useful if we filed it under future problems. The rest of this blog is built on three numerical relations that have been ignored. I believe they have kernels of useful thoughts.

 

Value of Market Index Leadership

Among the market indices, I pay particular attention to three. The Dow Jones Industrial Average (DJIA), the S&P 500, and the NASDAQ composite. I believe the particular index leading or lagging the other two is descriptive of the type of leadership driving the general market.

 

Regular subscribers to these blogs probably noticed I was getting increasingly bearish starting November 2021. This was because the NASDAQ Composite hit a new high in November, which was not followed by the other two indices. Furthermore, the NASDAQ was driven by tech companies, which seemed like a stretch. Projected gains as a percentage were greater than the prior percentage gains. The bulls on these stocks were probably overextended.

 

Currently, the index flashing caution is the S&P 500, which on down days flirts with its historic lows or scores a minor low. It remains very close to its low for the year. At the very same time the DJIA has risen most and is least analyzed by professionals. I call this weak leadership.

 

As of Friday’s close, the S&P 500 was up 5.41% and the NASDAQ up 0.56% from their respective 2022 bottoms.

 

How Much Do You Know about Your Stocks?

Many investors, including some professionals, treat some of their stocks and CEOs as icons to be followed regardless of results. Two of these are Warren Buffett and Charlie Munger. I would suggest that stock or political investors who do not regularly read Berkshire’s quarterly SEC form 10-Q are not being prudent.

 

In the latest 47-page edition they go through both the tax and legal reason they conduct business the way they do. The 10-Q was published this Saturday and most of the press focused on the reported loss resulting from price declines in their equity portfolio, as well as storm and accident losses in their insurance complex.

 

This information resulted from required SEC disclosures. What many articles either ignored or only later covered was the increase in operating earnings of the wholly owned, or at least 20% owned companies. Buffett and Munger believe that operating income is the real measure of their company’s progress. (They fought the SEC about the requirement to include the price movement of their portfolio in earnings per share, rather than just showing it as an adjustment to book value.)

 

They run the company as a giant trust account for the heirs of the present shareholders. As both an owner and portfolio manager for family and other accounts, I agree with them. Matter of fact, that is the way I look at most of my long-term holdings. To me, the after-tax free cash flow earnings of a company is the most consistent measure of an operating company.

 

When I use mutual funds and other portfolio holding companies, I recognize that outside people value the company by its actions in the market. To me, the impact of market action is a cyclical phenomenon, having more to do what other owners are doing with their assets. It is not the reason I hire managers to grow the assets for the beneficiaries of my efforts.

 

I therefore need to track both the after-tax operating cash flow and market input to judge the skills of my operating managers. I also need to evaluate how well I react to what the market does to my owned assets.

 

Believing a reasonably well selected portfolio of assets will rise through inflationary and other periods, I can be patient.

 

Selective Review of Prices Is Appropriate

Nothing about prices and the actions of people is guaranteed to be repeated exactly as it was in the past. Nevertheless, from time to time it makes sense to review what has happened in order to think about future portfolio actions.

 

The following are views of market analysts of a major financial-services company worth considering:

1.   US Treasuries may see a major bottom in March-May ‘23
2.   Some expected inputs that may also bottom:

A.   Lower Consumption

B.    Higher Savings

C.    Selling of stocks by retail

D.   Major Credit Events

3.   China to re-open

4.   Similarities with the 1973-first quarter - 1974 pivot

5.   Small Caps, which are not a target of government, will lead the market. A trend that could last five years


The next two years will be difficult, because enforcing discipline will be tough. Nevertheless, it is time to rethink investment strategy.

 

What are your thoughts and plans?

 


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

Mike Lipper's Blog: Rarely Found Different Thoughts - Blog # 757

Mike Lipper's Blog: Current and Future Views are Confusing - Weekly blog # 756

Mike Lipper's Blog: Fundamental Changes Occurring - Weekly Blog # 755

 

 

 

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