“Hide & Seek” - Weekly Blog # 880

 

 

Mike Lipper’s Monday Morning Musings

 

“Hide & Seek”

 

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

 

                             

 

Friday’s Victory Signal?

After an extended period of stock price declines, prices shot up on Friday. The “Bulls” hoped it was the beginnings of a “V” shaped recovery, but some market analysts were skeptical. A strong move often ends when there is a 10 to 1 ratio between buyers and sellers, which was the case with Friday’s 10 to 1 ratio.

 

The Wall Street Journal publishes “Track the Markets: Winners and Losers” in their weekend edition. It tracks the moves of 72 index, currency, commodities, and ETFs weekly. It may be worth noting that only 35% rose for the week.

 

The Second Focus

The media, and therefore most of the public focus on daily price changes. Even with the growth of trading-oriented hedge funds and the conversion of former securities salespeople into fee-paid wealth managers, the portion of the assets invested in trading is less than the more sedate investment accounts invested long-term for retirement and similar institutional accounts. My focus is on the second type, which includes wealthy individuals.

 

The Current Administration is Ignoring Us

The first step in security analysis courses often starts with reading what the government puts out in order to develop a foundation for an investment policy. The current administration is the most transactional in memory. The President, Vice President, and Sectaries of Treasury and Commerce made and lost money on market price changes. This has forced me to find other sources to build our long-term investment philosophy.

 

Inevitable Recessions

Studying both recorded history and our own lives, it tells us that life does not move in straight lines, but in cycles of irregular frequencies and amplitudes. Simplistically, we can divide these movements into good and bad periods. However, an examination of the periods reveals differences in how each period affects us. The differences and how they affect us depends on where we begin each cycle, the magnitude and shape of the cycle, and any surprises along the way.

 

Both up and down cycles are caused by imbalances within their structures, which often occur due to other imbalances known or unknown. Most importantly, any study of cycles indicates they happen periodically and surprise most participants. Even with detailed histories of cycles they can be difficult to predict, although the root cause of most cycles is extreme human behavior.

 

While some cycles are caused by natural weather-related events, most economic cycles are caused by envy and/or too much debt. I am perfectly comfortable predicting a recession will hit us, but don’t know for sure when it will occur. (In a recent discussion with a small group of senior and/or semi-retired analysts, they felt there was a 65% chance of a recession within 12 months.)

 

The fundamental cause of cycles is often the result of people reaching for a better standard of living through excessive use of debt, which often results in a struggle to repay debt and interest. At some point the growing federal deficit, combined with growing consumer debt, as evidenced by credit card delinquencies, will force a decline in spending. Reduced spending will lower GDP and production. The fact or rumor of this happening is enough to bring securities prices down.

 

Confusing Hide and Seek

Hiding is not the solution to avoiding a loss of purchasing power, both actual and supposed. Cash is the only true defense, although it is not a defense against inflation which reduces the purchasing power of most assets. However, the biggest long-term loss from hiding is foregoing future potential high returns.

 

Our Approach

I believe a cash level no larger than one year’s essential spending should cover the crisis bottom. Most of the remaining capital should be devoted to seeking out substantial total returns that can produce multi-year gains.

 

Where are these Gems?

Bargains are usually hidden in plain sight. One example might have been the fourth quarter 2024 purchase of European equities, which were priced for a European recession. However, European equities actually generated expanded earnings from Southeast Asia, Latin America, and Africa. (In a recent discussion with one of the largest investment advisers negative on investing in Europe. Their views were based on their continent’s own economics, while paying insufficient attention to companies growing profitably in the aforementioned regions)

 

Thus far in the first quarter I have been lucky enough to own both SEC registered mutual funds and European-based global issuers. (It took patience because earlier performance periods were not good.) This shows the need to be courageous when seeking future bargains. 

 

We would appreciate learning your views.

 

 

 

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Can’t Find Totally Risk-less Conditions - Weekly Blog #775

 

Mike Lipper’s Monday Morning Musings

Can’t Find Totally Risk-less Conditions

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

 

  

 

 

A Real-World Problem for Investors

Investors turn to advisors to get assurances that they are not taking risks with their money and their future. We can discuss the numerous risks of losing some or all of their money and should do so. But the news of Silicon Valley Bank (SVB) being forced to close and then taken over by the FDIC shows that these types of discussions were not had.

 

This weekend I spent considerable time thinking about “risklessness” and concluded that it does not absolutely exist, nor can there be such an asset in an absolute sense. There are known and unknown opportunities to lose all or some value of an asset.

 

The reason is that we do not live in a one-dimensional world where all is known, or unknown conditions exist. We and our assets exist in multiple dimensions. Few if any of the investors who sold securities in an IPO and deposited the cash proceeds in SVB were waiting for an opportunity to buy appropriate assets. I suspect most investors felt their cash was being held at one or more underwriters for a short period, not at a corporate depository.

 

If they considered it at all, they were pleased that their assets in the company were unencumbered by loans. My guess is that they never considered they were at risk of a “run on the bank” by unrelated depositors. But such a run happened, putting the bank in an insolvent condition, which led to bankruptcy.

 

Ecology

While it may come as a surprise, some investors were concerned about changing climate conditions many years ago. They felt it was not being appropriately considered by institutional investors in making investment decisions. The “buzz” word at the time was ecology. Which meant that if something changed, more things could change.

 

Today’s investors should dust off the old studies on ecology. A current example might be a military battle in the Ukraine causing the price of flour to rise in Egypt, which in turn factors in the price of Mideast oil rising, which in turn impacts gasoline prices in middle America and consequently the prices of local homes in the Midwest.

 

The World View

Today, every consumer and investor is a globalist, whether he or she likes it or not. This impacts transaction prices for everything he or she does, including wages and taxes. Funds that invest in Europe are increasing in price as they attract flows from America, where prices of US dominated funds are going down, leading to a decline in purchasing power for the US dollar.

 

US Investors vs Washington Politicians

The current administration in Washington has proposed raising taxes while continuing to curtail domestic production of goods and services. This will add to inflation as the world continues to fund a major war. Similar to society turning its back on climate and ecology years ago, which resulted in today’s conditions. Our government is pro inflation through restraint of trade and raising prices.

 

Last Week: Another Warning ex SVB

While most of the financial headlines on Thursday and Friday were focused on the implications of SVB, there was worse long run news for American investors, consumers, and citizens. The Standard & Poor’s 500 declined -1.58% for the week ended Thursday, similar to its performance for many prior weeks. However, the depressing news was that China Regional Funds, the largest contributor to world growth, had declined -6.31%. While China exports more than its imports, the major exporter to China is the US. If the US is going to get out of its near recessionary condition, it will need to export a lot of US products and services.

 

What Are We Looking For?

Last week there was significant weakening of market conditions. While paying close attention to present conditions, we are nevertheless searching for the stocks and managers that will participate and, in some cases, lead the next significant “bull” market. We are in the early stages of our search and it’s still conceivable we may go through a longer period of stagnation. We are searching for the kind of corporate leadership and product/services that demonstrate superiority. Some may be overseas, but many will come from the US. Please help us.    

 

 

 

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Mike Lipper's Blog: Data Performance/Easy.Interpretation/Not - Weekly Blog # 774

 

Mike Lipper's Blog: “This was the Worst Week of the Year” - Weekly Blog # 773

 

Mike Lipper's Blog: A Terrible Week - Weekly Blog # 772

 

 

 

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Michael Lipper, CFA

 

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“This was the Worst Week of the Year” - Weekly Blog # 773

Mike Lipper’s Monday Morning Musings

“This was the Worst Week of the Year”

 

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

 

 

 

Wrong Perspective 

No investor likes to see a markdown of prices in their portfolio. However, these declines are likely less than the future reductions that lie ahead. We may be close to temporarily removing one of several overhanging dangers. The real risk to our long-term condition is the possibility of a short or shallow recession! 

 

For the pains sustained we have taken little in the way of corrective actions. We have largely maintained the same sets of problems we had prior to the recent price declines. 

 

Throughout our society we have a deep leadership vacuum in most activities, from small startups to our largest organizations of government, commercial, intellectual, health, and non-profits. Our problem is not that current leaders are fundamentally evil. Our problem is that in too many cases the present leaders rose to their top positions due to their political skills of getting along. They had to make compromises in the short-term, which had serious longer-term penalties. This is natural because we judge success by short-term achievements. 

 

What Have We Created? 

While there have always had inefficient organizations, we have too many of them today. These zombies exist throughout all cultures. If we adopt Sir Isaac Newton’s view of God as the watch maker who controls the universe wanting us to learn how to solve our own problems without His help. God must periodically intervene through abrupt changes in weather and the economy. These corrective measures are seen to be periodic recessions.  

 

Humans don’t always take advantage of the first clues and sometimes repeated strong medicine is necessary. The wake-up medicine comes in different strengths and duration. History suggests three generic types: 

1. Recessions often caused by climate.
2. Price recessions where critical supply shortages cause long periods of stagflation and cover up structural changes in the rules of the game. There is a good chance of missing major corrections for a relatively short period. We are swapping time for the beginning of an intense correction.
3. The biggest percentage losers are those involved with companies labeled zombies. We should recognize that those hurt by zombie companies are not just the proprietors, but also those who have supplied equity and debt capital. Employees working for going concerns and communities housing the zombies could also be hurt. (Perhaps the time before the larger corrective recession hits could be used to reduce the large number of zombie companies.) 

 

Who Created the Zombies? 

The creators are not maligned leaders. They are just short-sighted in encouraging the zombies to grow and experience some prosperity. Normally, societies have constraints on growth to protect consumers and other capital providers. Periodically these constraints are relaxed or fail to be modernized to accommodate new conditions. The biggest relaxed constraint permitting large numbers of zombies to limp along is low interest rates. These companies do not have sufficient credit reserves and may not have been appropriately regulated by savvy regulators. 

 

Are You a Potential Zombie? 

Warren Buffett in his worthwhile annual letter to shareholders addressed the issue of pinpointing those that have insufficient credit. He suggests that those who I am calling zombies will be revealed as being naked when the tide goes out. 

 

While it is difficult to spot the soon to be naked players, it is not impossible. Warren Buffet and Charlie Munger have a remarkable record of avoiding problems. (Their few major loses are small in number and relative size. They follow the same strategy as the Kansas City Chiefs in the latest Super Bowl, as noted in our only non-weekly bulletin, which is about winning by avoiding losing. That is one of the main reasons we personally own shares of Berkshire Hathaway in other accounts.) 

 

The key characteristic of a zombie company is often a habit of admired=persistence. There is a critical difference between a zombie and a recovered hero. A zombie company persists in taking down its ship and all aboard who depend on their delivery. Those who recover stop digging their hole deeper. As investors we need to identify the critical player or players who have too much pride to abruptly return to shore before the next wave hits. History suggests that there is always an unexpected wave. 

 

Those who have made financial, political, and behavior mistakes, should look for self-help groups or a consultant that encourages them to periodically question their persistence. We should always contemplate the possibility of being wrong at some point in time.  

 

Subscribers, please share your successful review functions of questioning your actions.      

 

 

 

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

Mike Lipper's Blog: A Terrible Week - Weekly Blog # 772

Mike Lipper's Blog: Primer on Starts of Cyclical & Stagflation - Weekly Blog # 771

Mike Lipper's Blog: Words that Trap: Growth, Value, Recession - Weekly Blog # 770

 

 

 

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Is This Great Investment Era Ending? - Weekly Blog # 728

 

Mike Lipper’s Monday Morning Musings

Is This Great Investment Era Ending?

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

In recorded financial history two of the most important tools are Gresham’s Law and Arbitrage. Applying these tools may aid in thinking about the current decline in stock prices, which is likely to evolve from a cyclical bear market or a secular change into a structural change. (As with any prediction of the future, the analysis of the present can be incomplete, leading to incorrect judgements. Recognizing these risks, I hope it is useful to analyze the present and speculate on the future.)

The following observations may be germane to the analysis:

1. Most governments want to stay in power and attempt to do so by growing the money supply, providing food and other critical resources to keep most of the population tolerant of them. As with any gifts, there are costs disguised as taxes and restrictions. These “gifts” have now become very expensive, generating excessive inflation and lower currency values, which in turn impacts purchasing power.
2. Many restaurants and other retail establishments no longer take coin of the realm, but only accept credit card payments.
3. Around the world there is increased demand for crypto currency vehicles.
4. The invasion of Ukraine by Russia has focused countries on critical shortages of energy, selected other minerals, fertilizer, and most importantly food.
5. Wars are often fought between countries perceiving near-term differences in their supply of critical needs. We are approaching the possibility of a different kind of World War. Instead of East vs West, it is likely to be North vs South, with northern populations declining and southern populations growing. This sets up a transfer of resources and relative power.
6. No country has an absolute mastery of technology.
7. Global mass-communication implies widespread dissemination of both correct and incorrect information
8. Relative investment performance no longer favors the generation of sales, earnings, net cash, investment income, and similar measures vs the attraction of future products and services. (Within their respective investment leagues there are new leaders without much benefit of history or success.). 

Please add your own observations and communicate them.

Gresham’s Law came out of the observation that when governments use a less valuable currency in place of older coins with a higher mineral value, the holders of the older currency hoard it. In terms of usage, the less valuable currency drives out use the more valuable currency. Is that happening today?  If it is happening, how will economies restructure under that pressure?

One standard analytical technique is to look at an object, such as real estate or an artwork, and differentiate it from other measures. One wishes to own the lower priced instrument, hoping it will graduate to the level of the higher valued instrument. Sometimes it works, but the real value is the perceived price differential, which becomes an article of faith.

Just as Latin American Gold changed the entire European economy for approx. two hundred years, changes resulting from the imbalances observed above will likely have substantial ramifications for us all, especially for our heirs.

What do you think?

There are a lot of things happening that can be described as pointing to the upside, despite a negative picture overall. There are five mutual fund peer groups averaging better than 20% year to date: Natural Resources +31.55%, Global Natural Resources +22.86%, Energy MLP +22.26 %, Commodity funds +20.70%, and Latin America funds +20.54%. Similarly, there are commodity pool peer groups holding futures or commodities: hogs +27.5%, wheat +25.2%, soybeans +23.4%, orange juice +22.7%, and sugar +22.5%. It appears the invasion of Ukraine may have a bigger impact on the global food supply for Europe and China than energy. It may be fitting that this change is appearing now, as we close a financial, economic, and political era.

We should now begin to look carefully, finding what will work for us as well as against us. We are due for surprises and some difficulties, along with some victories.

Thoughts?                 

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

https://mikelipper.blogspot.com/2022/04/wwiii-slightly-delayed-bear-market.html

https://mikelipper.blogspot.com/2022/03/not-much-weekly-blog-726.html

https://mikelipper.blogspot.com/2022/03/relative-or-payout-returns-in-periods.html 

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.