2 Media Sins Likely to Hurt Investors - Weekly Blog # 820

 

Mike Lipper’s Monday Morning Musings

 

2 Media Sins Likely to Hurt Investors

 

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

 

 

 

Media Motivations

1. Almost everyone likes to make people happy.
2. Unlike in the past, some have recognized that good news sells more advertising than bad news.
3. Most media swings from the political left.
4. The media thinks as consumers do, not as investors do.

 

“Americans Feel More Optimistic About Economy”

“Feeling Sunnier on the Economy”

The first headline is from Saturday’s Wall Street Journal in the “news” section, not the editorial page. The second is from the Washington Post,

the DC trade press.

 

First Sin

The WSJ newsroom pitching to their perceived audience ignores the dichotomy between the “happy talk “generated by Washington and news of layoffs, closings, and bankruptcies. (Risks to readers losing jobs and eventually investment money.)

 

Economic stimulus through executive order or budget manipulation is used to inflate the economy. It is structured to buy votes from specific segments of the population. Businesses are simultaneously laying-off people, closing facilities, and cutting back on expansion plans. These businesses do not think the future looks good.

 

My guess is that business leaders are processing the math something like this. Actual or expected sales are not growing at all when price increases are deducted. Lay-offs of 3% are largely replacements for retirees, or for bad hiring decisions. Reductions of 10%+ are an expression of lower expected demand, or anticipation of unfulfilled expected improvements in the quality of work. For example, regularly cutting the bottom 10% of people to improve production at all levels. (This has been the annual policy of Goldman Sachs and others, even before receiving lower overall fees for their work.)

 

Since the beginning of recorded history, we have experienced expansions and contractions, or if you prefer booms and recessions. The last three administrations have added to expansions through inflationary spending. Government spending was less than the private funded expansion, although that is no longer true considering accelerating deficits. Thus, we are due for a contraction. In some ways the sooner the better, as it will help reduce the cumulative deficit accumulation. The exact timing of this contraction is beyond the skill level of most prognosticators. However, we should be forewarned that this is not what the media is currently doing.

 

Second Sin

On Friday the S&P 500 Index slightly exceeded its two-year old record. (There was no acknowledgement in the press concerning the calculation being market capitalization weighted. This means that the index is weighted and influenced by a minority of the universe. In other words, by the majority of the money, not the majority of investors. This distinction favors those trying to raise taxes and political contributions.)

 

Some believe this is a sign of a new bull market, as investors have profits in a minority of the S&P 500 stocks. Recent trading provides some perspective. On Friday there were 2918 stocks traded on the NYSE, of which 855 “big board” stocks declined. (More than the entire S&P 500.) The highest price for the NASDAQ Composite Index was on November 19^th, 2021. So, it is not yet a bull market for NASDAQ stocks. As of Friday, 4412 NASDAQ stocks traded compared to 2918 on the NYSE.

 

I consequently do not consider the market being at a new high, as most stocks are not at a new high. Furthermore, older market analysts believe a former turning point must be exceeded by at least 3% to signify a continuing move. To illustrate the importance of this test. The price hit a high at the end of 1929 and did not return to that level until September 1954, or about 25 years later. (No warning from the media and other prognosticators.)

 

Some Do Pay Attention to Warnings

In many ways the game of professional football is similar to professional investing. This week Jason Kelce, center for the Philadelphia Eagles and the least well-known football brother, announced his retirement. He is reportedly in good health, although he is concerned for his young daughters and the rest of his family. His concerns center around chronic traumatic encephalopathy (CTE), a mental health condition believed to come from head injuries. CTE is something an all-pro center could get. Stage 1 of the injury can produce depression, anxiety, and impulsive/aggressive behavior. (For many years as an investment adviser to the National Football League and the NFL Players Association who had retired players as trustees, I have witnessed such behavior.) His retirement probably cost him a few very high paying years, hopefully in exchange for many more years with his young daughters. SIMILAR HOPES ARE WISHED FOR INVESTORS OVEREXPOSED TO INVESTMENT RISKS.

 

For A Long-Term Estate Portfolio

One should not focus primarily on today’s purchase price, but a believed future value that addresses your heirs’ future needs. Today’s prices represent opportunities to both earn and lose money. Focus on unpopular securities to reduce the potential size of losses, and hopefully increase the chance of big returns. Part of the difficulty in implementing this effort is that it requires someone who is already skilled in this art form. It requires time and patience to do the necessary research yourself.

 

I am willing to incur the expense of using others for most of the work, including the impact of investor flows by others. The following list of geographic locations for investment came from a recent contact with a fund that searches for these types of investments. The following list is a source for beginning a research effort, not a buy list.

 

Emerging Markets, Kazakhstan Telephone, Platinum, Palladian, Potash, South Korea, Uranium, Copper, Gold, and Chinese Securities (CSI-300 at a 5-year low)

 

Selection Concept

Passive funds have attracted more assets than active funds. Many passive funds are required to keep their portfolios in-line with an index, requiring them to buy when nervous holders are selling, and sell when their holders are buying. Assuming these movements come in waves and that many waves are emotionally driven and wrong. Does this represent a trading opportunity, as excessive trading is not well thought out? This may particularly be worth a try when only 17% of portfolio managers expect a hard landing. Another curious opportunity, long-term institutional favorite Morgan Stanley fell -4.2% and Goldman Sachs rose +0.7% (Both are owned in personal accounts and GS is in both personal and client portfolios.)

 

Question:  How are you thinking about your investments for the next year, versus how you’re thinking about your long-term investments? 

 

 

 

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

Mike Lipper's Blog: “SMART MONEY” Acts Selectively - Weekly Blog # 819

Mike Lipper's Blog: Solo Messaging is Meaningless - Weekly Blog # 818

Mike Lipper's Blog: Our Wishes & Perspectives - Weekly Blog # 817

 

 

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Contrarian Bets and other Risks - Weekly Blog # 597

Mike Lipper’s Monday Morning Musings

Contrarian Bets and other Risks

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

A good bit of the reported sentiment suggests we are entering a significant market decline, followed shortly by a recession. To the extent that these opinions represent the popular view, my training at the New York racetracks suggests a contrarian view. The popular view is driven by a two day, eight-hundred-point decline in the DJIA, or an approximately 3% change compared to a frequent daily movement of about 1%.

There are two statistical measures that are also pointing down. These have often been wrong in terms of the direction of the US stock market for the ensuing six months, as indicated below:

• American Association of Individual Investors (AAII) surveys a sample of its membership each week to determine if they are bullish, neutral, or bearish on the US stock market. Extreme views are those values above 40% or under 20%. This latest week, Bullish sentiment was 21% and Bearish 39%. Three weeks ago, showing how volatile these views can be, the Bulls represented 35% and the Bears 28%.
• The buyers of Put and Call options are very focused on the near-term and when the Puts (bets on stock prices declining) reach historically extreme levels, they become contrarian indicators. Last week the ratio of puts to calls on the S&P 100 Index was 236 to 100. Similarly, the overall ratio of puts to calls was an above normal 73 to 100, normal is 60/100.

Longer-Term Risks
I previously noted that one of the most successful corporate pension funds moved out of equities years ago after they produced a 20% annual gain. They thought the result was unusual because it was between 2 and 3 times their actuarial assumption, suggesting they should withdraw from equities until the following year.

There are hardly any two-year periods with two back-to-back +20% gaining years. As of the end of the first nine months of 2019 there were 14 mutual fund investment objective averages producing +20% or more returns. Of these, the two biggest gainers in the last ten years on an annualized compound growth basis were  Large Cap Growth +13.37% and Multi-Cap Growth +13.21%. I suspect that the average fund in those two categories was loaded with what we used to label FAANG stocks (These averages with the leading performers are clearly doing a lot better than +20%).

Perhaps even more instructive is that the leading investment objective average for the last ten years was Health/Biotech Funds, which rose +15.41% but gained only +6.2% in the first nine months of this year. (For those who are going to be judged by their performance over the next five years it may be prudent to reduce exposure to managers that have produced +20% gains this year, with the understanding that these reserves will be recommitted to equities near the end of the next recession.)

There are other risks beyond staying too long with oversized winners. The biggest one has two names, prediction risk and execution risk. Most future projections are linear in nature and tend to be top-down, starting with aggregate demand or top-line revenues. Sports gives us two examples where this doesn’t work.

While I used to manage the National Football League-NFL Players Association Defined Contribution Plan, I do not claim to be a football analyst. However, I suspect more touchdowns are earned by broken plays than those illustrated on chalk boards in training camps. One of the great heavyweight boxers used to say that plans evaporate the moment your opponent hits you in the face. Far too many analysts and investors take future guidance from a company as a somewhat guaranteed plan. To me, I try to focus on the execution risks of any plan. I try to get some understanding as to what could go wrong and most importantly who will fix it. What I learned in the US Marines was that officers issue the orders of a plan, but enlisted men (particularly the corporals and sergeants) accomplished the missions, regardless of what is on paper. That is why in looking at operating companies I like to have an idea of who the supervisors, directors, and department heads are. With funds, while the portfolio managers are important, the key decisions are in effect often made by the analysts, traders, marketers, salespeople, administrators and occasionally the chief investment officer. These are the people who will execute the reality and are critical in our decision-making process.

One final set of risks bearing down on the current investment process comes with the initials ESG (Environment, Social, and Governance). This is not the appropriate vehicle to discuss the validity of the arguments for and against these tenants. My concern is that beneficiaries will suffer because insufficient attention is paid to prediction and execution risks. Below is a list of past predictions in terms of climate change which have already proven to be wrong:

          Year   Prediction

• 1966 - Oil gone in ten years
• 1970 - Ice age by 2000
• 1976 - Scientific consensus of planet cooling, famines imminent
• 1977 - Department of Energy says oil will peak in the 1990s
• 1988 - Maldives islands will be underwater by 2018
• 1988 - World’s leading climate expert predicts lower Manhattan underwater by 2018
• 1989 - Rising sea levels will obliterate nations if nothing is done by 2000
• 2005 - Fifty million climate refugees by 2020

Source: Calafia Beach Pundit quoting Mark Perry’s blog

While most of us are occasionally wrong in our own predictions, we need to understand the basis for forming the prediction.

The Biggest Risk to Fixed Income Investors
Having just questioned the process of predicting, I call to your attention a presentation made by Theresa Gullo, Assistant Director for Budget Analysis of the Congressional Budget Office to the National Association of State Budget Officers on “The Long-Term Budget Outlook”. The bottom line is that the CBO estimates that there is a two-thirds chance that federal debt will be between 71% and 175% of GDP in 2039. The two biggest culprits are major health care programs and net interest. Of the major developed countries, the only two running a surplus are South Korea and Russia. It seems likely to me that that many governments will increase their efforts to overcome the drawdown from innovation by materially increasing the global rate of inflation. This raises the potential of insufficient funding to satisfy fixed income beneficiary needs. 



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/09/mixed-near-term-after-recession.html

https://mikelipper.blogspot.com/2019/09/capital-cycles-changing-weekly-blog-595.html

https://mikelipper.blogspot.com/2019/09/concentrate-or-diversify-2-questions.html



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Friday and Super Bowl Investment Lessons - Weekly Blog #509

Introduction

Sound investment thinking should not be isolated into an island of investment and economic numbers. The powerful future trends are not found initially there. The future is determined by people and how they think and occasionally react to what they feel about what they think they see. On this Sunday we are between Friday’s worst stock market decline since 2016 and the most significant Professional Football championship. Both or neither could be guides to the 2018 investment future.

Friday’s Stock Markets Actions

Depending on your personal favorite stock price measure, there was a low to middle digit percent decline was the beating headline. Far too many saw the fall as an automatic signal of potentially a much bigger slump. As usual, too many did not look further into it to see the significance. To me, they missed three important inputs staring with the smallest and moving through to more major structural issues.

Warehouses Provide Pricey Liquidity

Early in my investment career at a famous trust bank, I came across some large cap stocks that were unlikely to be price performers that were in numerous otherwise reasonably sound portfolios. The conservative investment still carrying the burden of the learned Depression experience were afraid in the 1960s that the then economic expansion would end with a substantial stock market decline. They had learned the risks of premature market timing and opted to put a portion of their client’s trust money in stocks that would rise in some symphony with an expanding economy, but would fall less than the market when the turn came.  The classic warehouse stock was AT&T which had not changed its common stock dividend since 1922. In effect it became a bond substitute and rose when yields declined and grudgingly held most of their value when interest rates rose in a contraction. (The current AT&T is not the same company and today may or may not be attractive due to its relatively high yield and the prospective benefit of the forthcoming 5th generation of the internet.) The owners of warehouse stocks were not criticized when they cashed in these stocks and used the cash to cushion the portfolio decline and eventually use the cash to buy more aggressive stocks at cheaper prices.

What appears to have happened Friday was several handfuls of large cap stocks fell more than the general market excluding these stocks. Many of these stocks were dominant holdings in Large Cap Growth mutual funds and similar ETFs. Numerous Mid and Small Caps fell much less. Is that due to the fact that they did not have a “warehouse function” on the way up or that their owners recognized that the trading capital in the market was unlikely to support significant sudden liquidation of the smaller brethren?

What I takeaway from Friday’s market action is a concern that there is not sufficient liquidity in today’s market to absorb easily a broad scale sell off.

Liz Ann Sonders/Minsky Moments Explanations

Liz Ann Sonders, Charles Schwab leading market analyst points out that there is a history of years with low stock price volatility and are followed by higher ones. As one of the better analysts on market sentiment and its limits, she points out that in the last three weeks in January the S&P500 went up over 7.5% and if annualized would have added 155% for the year.

Her caution parallels an earlier worry of the great Austrian economist who noted that periods of economic stability end with periods of instability.

Bottom line: too much complacency can be dangerous to your wealth.

Supply/Demand Better Analysis

All to often we make financial decisions based on numerical comparisons. Yet what we call judgment in many cases are human memories that our brains carry. For example, we tend to measure corporate success in terms of dollar revenues. Many automobile manufacturers are showing record dollar revenues, but in terms of units sold or even more important, number of customers/ families served, the results are more discouraging. The shift from two door sedans to five door SUV models hides these trends. The current enthusiasm for stocks is based importantly on better profit margins as taxes and burdens of excessive regulation are enlarging profitability. Most of the countries in the developed world have reached peak population except for immigration. In the US we have one birth every eight seconds, one death every ten seconds. Including migration, we are adding one person every eighteen seconds. Global population  is adding 4.3 births per second with deaths 1.8 per second which translates to 2.5 persons per second. This suggests that the US population’s future economic growth is more likely to come from serving and being served by people in the Southern Hemisphere with particular focus on Africa and Southeast Asia.

While I can direct our clients investment policies to these geographical   centers, until our society does we need to understand our loss of economic and financial ranking. What may make this task even more difficult for their own needs, government and central banks are attempting to manage inflation. They have not been particularly successful. Apparently inflation is actually a derivative driven by currency and trade. These in turn are propelled by a combination of consumers and commercial interests.

Hopefully Friday’s action suggests to all of us that we are living in a changing world where the future is not going to be copied from our old experiences.

Boston-Philadelphia Super Bowl Investment Lessons

Perhaps it is particularly instructive to search for investment lessons from a championship that puts football teams from these two cities against each other. While these two are no longer the largest or politically the most powerful cities in this country, they have contributed greatly to the formation of the US global financial community. Boston due in part to being the home port for the ships that spent years trading with Asia developed a culture of trusted capital management. Even today much of federal and other states’ law that directs much of the fiduciary principles that supervise the asset management industry. At one point there was more money managed by Boston law firms than the mutual fund business.

Philadelphia was not only the home of the Congress at the beginnings of the United States it also developed the key to capital equipment financing. Philadelphia lawyers created railroad equipment (boxcars) leasing certificates which created a global market for transportable assets and in turn supported the global market for mortgages.

For twenty years until I resigned, I advised on the management of the defined contribution plans for the National Football League and the NFL Players Association. From this experience, I believed that on any given day any team within the NFL could beat any other team. Thus as of this  Sunday afternoon I do not know which of these good teams will win. What I do know that the winner on a net basis will have the best combination of offense, defense, capitalizing on surprises, and leadership throughout their organization. These are the very same characteristics that I look for in selecting fund management organizations for our clients. Other inputs for us today are an assessment as to consumer acceptance and politics as seen through the eyes of the media which will color some of our investment thinking as well.

In Conclusion

I hope that we can draw appropriate conclusions from both Friday’s price actions as well as the Super Bowl; thus to be able to manage wisely the year ahead which is likely to be more difficult than 2017.

__________

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Investment Thoughts on the Super Bowl - Including Post-game addendum

The  Super Bowl is a uniquely American Event. Outside of the US, the only equivalents that I can think of are the World Cup for football (what we in the US call soccer) and possibly the Melbourne Cup race (for thoroughbred horses) in Australia. To place the Super Bowl’s importance in the American context, I have been told that over 170 million will watch the game this year, or about 50 million more than voted in the last Presidential election.

My long-term readers may remember that last year I blogged from Shanghai, after watching the game with a single color commentator and very few commercials. I missed the commercials, which I will discuss in a moment.

Two other points of disclosure are needed before I discuss my investment thoughts. First, as indicated many times in the past, I search for investment implications of just about everything to which I am exposed. The second, is that for many years I have had the privilege of working with the National Football League and the NFL Players Association on their defined contribution plans governed by their collective bargaining agreement.

Comparisons between professional football and institutional investing

Both efforts require a high level of training, energy, integrity, risk management, and the recognition that there is an end to every game, but also there is always the next season or market. The role of analysts is to review all relevant past history to determine potential risks and rewards generated in the past. In last week’s post I listed 19 different measures that I look for in examining different stocks and funds. The 19 measures are far from exhaustive. (The key point to the list is they are not directly imbedded in any ETFs that I know.) Recognize that both football analysts and securities analysts are essentially historians. Putting these historical evaluations to work is the job of the quarterbacks or portfolio managers who need to update the history based on game day evaluations and the ability to see new opportunities and threats. In the end the quarterbacks and portfolio managers must execute both the planned plays/options and the broken ones. The coaches or chief investment officers need to provide that the right people are on the field or on the right desk, as portfolio manager, analyst, trader or administrator. The owners of the teams and the investing institutions need to have a long-term view as to the commercial success of their ventures in order to have enough of the right resources to build their franchises for the long term.

Investment inputs from the sidelines

One very successful hedge fund manager looks (as I do) at the Super Bowl television commercials very closely each year. He has a view that those sectors that predominate are often not good investments in the ensuing year. This year he believes that snack food and drinks fill that category. During the periods of market uncertainty many portfolios built up their positions in consumer staples. If we have any sort of the continuation of the January rise, where Mid and Small Cap funds gained 6 and 7%, it is likely that money will flow out of consumer staples. One under-owned area other than financials is problem-solving technology. The NFL is considering utilizing Kevlar and other approaches to improve the players’ helmets and reduce the impacts to the brain of concussions. This is a big problem, but similar to other problems that technology can help.

Occasionally Super Bowl ads can have important strategic implications. My favorite is the 1984 “attack” ad by Apple for its introduction of the Macintosh computer against the unidentified grey competitor of IBM. While the commercial may not have helped Apple, the implications of the ad eventually led to IBM selling its PC business to Lenovo who appears to be making a success of it.

One of the conundrums currently facing investors is the rate of inflation. The Federal Reserve believes that there is little inflation present today. One of the realities of this year’s game is that an “Okay” ticket at list price costs $950, up $50 from last year and less than half of the price that scalpers are offering for tickets. This is just one small example of government data being out of date or inaccurate. Recently we have seen significant corrections of past data from many US cabinet departments. One gets the impression that the current group in Washington is relying on its out of date internal numbers without having enough contacts with the real world outside of the Beltway. At some point this condition is likely to cause policies to be abruptly changed.

Can the January performance continue?

In general, our clients were relieved with their investment performance for 2012 and will be thrilled by the January, 2013 results. If the 6%+ mutual funds’ gains for the month would continue to be compounded over the year, their accounts would just about double. This is very unlikely considering they had gains in the teens to low twenties for 2012. Perhaps more important is that a multiyear expansion is a risky bet. Any series of numbers is fair game for out of-the-box comparisons. That great sports paper, the Financial Times in their Saturday “Lex Column” had a note suggesting a three year hangover. In 2000, which was the first time the S&P 500 broke 1500, the final score of that year’s Super Bowl was 23 to 16, or an aggregate of 39. In the following three years the S&P 500 Index declined 39%. The next time the S&P 500 got to 1500 was in 2007, when the Super Bowl score was 29-17 or a combined total of 46, and the index dropped an amazing 47%. As we are getting to the 1500 level on the S&P 500, the FT would like to see a scoreless tie. While this aside is amusing, one should remember that various fiscal problems facing much of the developed world are not being fundamentally addressed and to use the vernacular, are being “kicked down the road.” I would suggest that a wise coach needs to bone up on defense for the coming markets while enjoying the scoring opportunities today, even as the press, the pundits, and the central banks suggest the water is fine to plunge into. As a basic contrarian I doubt it. 

Which team will win?

Because of my professional responsibilities, I must remain neutral. I do hope my team, the on-field officials in their striped uniforms, call a great game this evening. Go Zebras!

Post-game addendum:

Using the FT’s “Lex Column” math, the final score of Baltimore 34 - San Francisco 31 would suggest that from these levels the S&P 500 could drop 65% over the next three years. I do not believe that the stock price penalty will be anywhere close to that decline caused by the markets' recognition of the manipulations caused by the central banks at the bequest of the politicians.

The second half had two elements that we could translate back into our investment world. The first was the power failure that put half the stadium in darkness for about half an hour. This was an outside technological failure. Almost every major marketplace over the last several years has experienced something similar. In our interconnected world, with aging electrical grid systems as well as inadequate attention to our infrastructure, we could be shut down for awhile. (Just think of super storm Sandy and what it did to a relatively small part of  New York and New Jersey.) Just as the players and the crowd at the Super Bowl did not panic when this problem happened, we shouldn’t. The second element is that we should always be alert to the possibility of reversals. At the end of the first half, the Baltimore Ravens led by 21 to 6. As noted the final score was Baltimore 34 to 31. This meant that in the second half the San Francisco 49ers were about twice as productive as the Baltimore Ravens, 25 to 13. Market participants should be aware that rallies off bottoms can be very sharp and could set up new highs if their energy is not sapped by the rise.

In the US, the two financial commercials that I think worked well were Prudential’s on the need to invest for our longer lives and E-Trade on the need to invest wisely.

Thus, we can learn a lot about investing by watching the Super Bowl.   

 

___________________

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Copyright © 2008 - 2013 A. Michael Lipper, C.F.A.,

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Contact author for limited redistribution permission.