Odds Favor A Recession Followed Up by the Market - Weekly Blog # 881

 

 

Mike Lipper’s Monday Morning Musings

 

Odds Favor A Recession Followed Up by the Market

 

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

 

                             

 

The Art of Security Analysis

Security analysis uses science but is not science. Using past statistical history of up vs. down markets, one can calculate the odds of a down market. The odds suggest something along the lines of one down-market for four up-markets. This math does not tell us anything about the amplitude of the next up and down phases. Where the art comes into play is searching past cycles to measure the varied amplitudes and more importantly the probable causes. Market moves in the minds of market participants are often tied to economic, financial, political, climate, and other elements. There is a human need to explain phenomena, so it is natural that in most cases investors and others attach some non-market element as the cause for the moment. In truth, while it is comforting to label the movement as being caused by some external force, no two market moves that are exactly alike. We cannot absolutely prove the cause with any certainty.

 

While professional analysts look at many causes, they are not really called on to make a judgement as to what is the next element that causes the movement. Thus, professional analysts often rely on the irregular rotation of up and down-market phases in commentary. Based on this principle, I am turning bullish because I believe for whatever reason we have entered a down-market of some unknown amplitude, which will be followed by an up-market, again of unknown amplitude. History suggests, at least in the US, the odds favoring a larger gain than the prior loss. To provide comfort, analysts attempt to find reasons to support this belief, which I will do without the absolute confidence I have found the motivating force of the eventual bull market. (Subscribers are encouraged to suggest other drivers.)

 

Too Much Weight on One Side

In one edition of a supposedly learned publication, there were three articles published with the headlines listed below. What are the chances the Financial Times is wrong?

• “How Low Can the Dollar Go”
• “Trump lunches full-scale assault on American elite”
• “An all-out assault on the rule of law”

Is there any connection between the authors and editors? This concerted view reminds me of the British Crown after they outlawed slavery commercially while British merchants supported the US Confederacy. Did their support have anything to do with the import of US cotton to fill their clothing factories?

 

The Future

It seems commercial motivations override political principles, which is true today. While politicians throughout the world are concerned about factory employment, they do not favor the economically larger consumer marketplaces. I find it interesting that the two largest consumer markets are China and the US, which don’t have politically powerful unions representing them!

 

On this side of the pond, Barrons Weekly published the stock market performance of 28 national indices showing 14 European countries leading as well beating the US local markets.

 

In the US it was the first week our indices were up a bit. However, it was not true for the bulk of our stocks. Friday’s gain, particularly on the NYSE, probably had more to do with the expiration of options.

 

By definition, a stock owner is future oriented and usually expects others to pay higher price/earnings ratios for their stocks in the future. The depth of the bear market will depend on whether P/Es’s hold and if their prices decline in line with earnings or rise in a cyclical recession or collapse in a structural one. I don’t know which type we will suffer, although many of the current administration’s moves appear to be more structurally focused.

 

The World keeps on producing products and services that have the potential to change economic patterns. Three recent products come to mind:

               *New lower cost airliners

               *BYD’s fast charging batteries

               *Florida’s leading the way to lowering property taxes

What do you think?    

 

 

 

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Changing Steps - Weekly Blog # 807

 

Mike Lipper’s Monday Morning Musings

 

Changing Steps

 

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

 

 

Reason for Cycles

Throughout human and geological/climatic history one can detect repeated periods of similar, but not identical elements. These periods are often immediately opposite prior cycles. Humans tend to be coin flippers. On the one side is greed and on the other is fear. Both are motivated by a desire for qualities we don’t have in sufficient quantities, the assurance of safety from others. The longer we suffer from the perceived deficit, the greater the perceived need.

 

In the natural world dominant forces are eventually met by counter forces, which brings them back to some form of equilibrium. Both written and geological history record frequent but irregular cycles. History records the existence of cycles, but not the motivations that created them. Literature about historic events tries to fill this gap, although it is disadvantaged by those hoping to curry favor with the winners and their write ups.

 

Futurists

Many people are content to take one day at a time and not focus on the future. Those of us responsible for doing something today for future beneficiaries recognize that we will be judged by the conditions that exist when beneficiaries get “their” assets. We are thus cursed by future perceptions of how we deal with investments today.

 

Where Are We?

Many of us have traveled with children or other impatient people who repeatedly ask, where are we? Or worse, when will we get there? In truth, we don’t know. It is the same in dealing with investors, or worse, their “gatekeepers.”

 

Tell The Truth

Most of the time in traveling through the investment cycle we don’t know where we are going or when the cycle will end. My approach is to share my current thinking, including identifying many things that I don’t know. I always try to look for clues that could possibly identify a change in direction.  I risk will be wrong some of the time before I recognize my mistakes. I believe we are in the early stages of an important change in the behavior of this cycle.

 

The Beginning of a Cyclical Change

(I hope my clients and beneficiaries forgive me for not getting the right decisions quickly enough.)

 

Evidence List

1. Lowest number of sales of previously owned homes since 2011.
2. Yields on 30-year Treasuries have broken above 5%.
3. Change in Leading Indicators, -9.67% for last 12 months.
4. Private Equity and Credits are struggling to find new clients, including the public, which is usually a sign of increased risk.
5. Fixed income-oriented funds have lost money for 3 years, some for 5 years. Funds invested in alternatives, value, and small company growth, are also struggling to perform.
6. If October stock and equity fund performance ends with a decline, the major averages will have declined for 3 months. The equally weighted S&P 500 Index has fallen this year.
7. It is possible the average stock may finish down for the year, completing a 3-year period of stagflation.
8. At current or higher interest rates, money previously invested in stocks may get invested in bonds, both by the public and by pension/retirement funds.
9. We are seeing signs of deflation in that sales discounts are showing up. Some may conclude President Biden is repeating FDR’s mistakes, which won’t end well and may possibly include a war.

 

Shopping List of Potentials

A number of well-known, former leading companies have new managements who have shifted their focus from building returns for shareholders to instituting policies that appeal to socially oriented institutions. This is particularly true for financial service companies, a sector likely to see more concentration. It is probably too soon to buy them, as they are likely to have a few more periods of less than good earnings ahead of them. These companies will either shrink to unimportance or will be better served by new management and owners.

 

Currently, most small companies are valued at half or less than large companies in terms of P/E or Price/Book value. These small companies are often better managed and more focused on investment returns. They could be the source of critical people and the attitudes needed for a turnaround.

 

Question: Are you looking for turnarounds?

 

 

 

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Mike Lipper's Blog: Change Expected - Weekly Blog # 806

Mike Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805

Mike Lipper's Blog: Prepare to be Bullish, Long-Term - Weekly Blog # 804

 

 

 

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Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

What does your 4.0 Profile Tell You? - Weekly Blog # 763

 

Mike Lipper’s Monday Morning Musings

What does your 4.0 Profile Tell You?

 

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

            

 

 

When one sees a mark of 4.0 it usually signifies academic perfection. As the investment game is different from other realities, so too are our measurements and goals. As much as we try, none of us has established a long-term investment record where each investment in each period produces a satisfactory performance record. We need a different type of measure to produce a learning device to improve performance.

 

These thoughts led to four inputs for investment action. After listing the four, it became clear that each label ends in an “o”. Recognition of these inputs might help sum up the importance we attach to each and explain what type of an investor we are and the performance we generate.

 

The four main inputs are:

• Macro
• Micro
• Politico
• Psycho

 

Macro is the generalized investment thinking of most people. As discussed in recent blogs, most pundits and their dedicated investors are in one of two camps. They either believe or don’t believe that investment gains are being held back by inflation, with changes in the level of interest rates the only way to cure the problem. The second group believes that current performance is due to broader structural problems and basic imbalances. Among these problems and imbalances are the lack of constructive leadership throughout society, including politics, education, the non-profit sector, and businesses.

 

As a life-long student of investment performance I suggest that it is extremely rare that the current generally accepted macro view will correctly predict the future.

 

Micro inputs can be translated into “God is in the details”. Some of these details are derived from audited statements where there are very few mathematical errors. (Other than measuring the wrong things in the wrong way.) As an investor I value incomplete observations of changing elements more. Such as changing of the number of workers doing different tasks, changing the number of customers making spending or selection decisions, or the number of customers consuming specific goods and services. My interest is not the raw numbers themselves, but their volatility and where they fall in the range of past actions. The key is to recognize changes in people’s behavior and try to guess their motivations.

 

Politico also consists of two parts, what is likely to happen and what one hopes will happen. The closer the two are, the less likely the result will occur. Interest at various levels may also influence perception, be it international, national, local, industry, organization, or family. As a practical matter, the interest of greatest impact will likely be the reverse of the order above.

 

Psycho deals with our optimism and pessimism, including the confidence in our personal ability and willingness to make meaningful change.

 

Applying Inputs

As with any composite of inputs, one can treat each equally or weight them appropriately. For example, I might weight macro 2, micro 4, politico 3, and psycho 1.

 

In this situation it would be difficult to select investments that didn’t have strong micro attributes. Politico would also be an important consideration. Both macro and psycho would only be important if micro and politico were not individually selected. Under these conditions I would be unlikely to act on macro influences but would probably make moves if micro or perhaps politico exerted strong directional inputs. In general, I would need more evidence to make major changes to my portfolio based on macro events. (A second level adjustment could be applied to the strength of my belief in each. For example, 90% for micro and 10% for psycho.)

 

There are many other selection processes. Some work better than others under different circumstances. The value of understanding one’s selection biases is to direct focus to what is important.

 

Clues of the Week

Each journey starts with a first step, as does each long-term investment record. Our problem is that we don’t know which week is the beginning week.  Additionally, no long-term record has each week moving in lockstep with the long-term record. That is why we search for clues each week. As with many investigations we look at many clues, some of which will be wrong. I summarize in these blogs the most likely.

 

In terms of forward motion there wasn’t much this week, but it is possible the ratios of new high/new lows, volumes, leading/lagging sectors, and news from beyond the stock markets could be instructive.

1. On the NYSE, new lows were larger than new highs each day. (Only true for 3 days on the NASDAQ.)
2. More shares were sold at declining prices than rising prices in 4 out of 5 days, with weekly volume -2.6% for the NYSE and -6.1% for the NASDAQ compared to the prior year.
3. Of 32 S&P Indices, only the Asian Titans 50 rose for the week. The prior leaders, energy and financials, turned down, while healthcare and tech rose.
4. Personal Savings were +2.3% vs +7.3% a year ago. Steel capacity usage was 73% vs 82% a year ago. A Jeep Cherokee factory to indefinitely lay-off workers in February.

 

Despite the “happy-talk” of inflation peaking and interest rate hikes slowing, investors and consumers are not buying a turnaround.

 

Incomplete Strategy Labels

Pundits and marketeers prefer short, snappy labels for various portfolio strategies. These are typically one-sided as they only describe the purchase side, not the other strategies excluded. Below are some examples of more instructive labels:

• S&P 500 Index - Market-cap or equally weighted
• “Go to Cash”- Freeze the rest of portfolio
• All investors - Traders, investors, taxable or tax exempt (deferred)
• High/low P/E without identifying the date - Price is current when earnings lag. (I prefer to use operating or net cash flow after debt payments.)
• High/low volatility without identifying the period of volitivity -Intra-day, daily, weekly, monthly, yearly.

 

Readers may have their own examples of mis-labeling.

 

 

 

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Mike Lipper's Blog: Trends: Deflation, Stagflation, or Asian? - Weekly Blog # 760

 

 

 

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Copyright © 2008 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.