More Evidence of New Era - Weekly Blog # 874

 

Mike Lipper’s Monday Morning Musings

 

More Evidence of New Era

 

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

 

 

 

For some time, I have viewed US and global markets as having entered a “New Era” phase. As with any transition, until it is complete it is possible the trend will not finish and reverse to the old happier trend. The self-appointed job of this analytical observer is to regularly make observations as I see them.

 

The Rise of the Investment Manager

Independent custodians who are also not investment managers are losing influence with the owners of capital. I see assets leaving bank custodian/ investment managers and going primarily to investment managers who custody their own assets or contract out the custodian function. One clue is this week’s announcement that the head of JP Morgan Chase trading is joining an independent hedge fund. Insurance companies have been reducing their direct management of institutional equity assets and hiring independent equity managers.

 

At the World Economic Forum it was recently noted that the number of individual Trillionaires will shortly grow from one to five, if not more. This is more a function of concentration than growth in the market. Part of the problem is the growth of business investment being small to flat after the impact of inflation. One of my concerns is the anticipated AI flows going into various “sales channels” and making them more efficient, rather than increasing the number of units sold. One disturbing factor is the size of the global R&D budgets, excluding inflation, being relatively flat over the last five years.  

 

US Education a Particular Problem

Global growth is often the result of a better educated workforce. While the US has the largest and most expensive “educational” system in the world, it is not producing a workforce that measures up on the world stage. (The reason for the quotes around education is that in the US we have substituted education for schooling, which uses “social promotion” or teaching to pass the test rather than teaching students how to think logically.) Mike Bloomberg, the former Mayor of NYC, points out that only 67% of 8th graders scored at the basic or better reading level, the lowest level since 1962. What I find more distressing is that only 60% of 4th graders pass a basic math test. This is not going to help over half the US population in the “AI” world.

 

Investors are Worried

In the latest week of generally bullish projections 51.7% of the stocks trading on the NYSE went down, which was surpassed by the NASDAQ where 58.2% declined. The regularly published sample survey of the members of the American Association of Individual Investors (AAII) showed 41% being bullish, down from 43.4% the prior week. What may be more significant is the percentage of those being bearish rose to 34.0% from 29.4% the week earlier.

 

Walking Around Analysis

I know a number currently unemployed people of all ages with good resumes and work histories, who are having difficulty getting hiring interviews. Fewer and fewer companies are hiring. When I walk through high-end shopping malls, I find the better stores understaffed. When speaking to operating people in profit and non-profit organizations, they say they are experiencing measurable declines in operational efficiency. They point to their organizations and/or their suppliers being hollowed out by absent workers of all levels from senior management to first level people.

 

One wonders how long growth in the economy and markets can continue with a poorly educated workforce who all too frequently are absent from work. In the near future companies will have little alternative other than to use AI to compensate for this decline in productivity. The tragedy will be the millions of uneducated and unmotivated employees left on the sideline because they can’t compete. Education in America is desperately in need of a solution, hopefully a new administration claiming to be in search of excellence can deliver it.  

 

As an analyst I suspect the interim results this year will disappoint.

Please tell me if I’m wrong.

 

 

 

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

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Dull Markets Are Dangerous for Investors - Weekly Blog # 683

 

Mike Lipper’s Monday Morning Musings

Dull Markets Are Dangerous for Investors

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

Why?

Not only because “quiet comes before the storm”, but dull markets give you the luxury of time for thinking and researching. Investors can use unhurried time to search for better investments and improve on the selection process, although most investors focus their energies on security selection. Some wise investors will ponder the processes used to manage their investment responsibilities, while commentators focus on the first group in the majority. As an investor for more than sixty years managing money for a limited number of investors and for my large family group, I am more concerned with the second need. Few pay enough attention to a periodic review of how we make decisions. Assuming you can make reasonable selection decisions, improving the decision processes will produce better results for the beneficiaries of your efforts in the long run.

Why Now?

Rarely can we assess in an unhurried fashion and review how we think about investing. We have such an opportunity right now. For at least the last six weeks the popular US stock market indices have been fluctuating within a trading range on relatively low and unconvincing volume. This is very logical if you believe equities are primarily priced on what they are expected to report in future periods, not what they have already reported. Expected future earnings are usually discounted at the current “riskless” interest rate of government bonds. Currently, many believe interest rates on US Treasury paper insufficiently discounts future inflation, pointing to the weakness in the valuation of the US dollar in multiple foreign exchange markets.

Others feel that after more than year of stock market gains it is time for a rest. Some point to the likelihood of not as favorable earnings comparisons after an expected large jump in the second quarter, especially when compared to the slow initial rebound in last year’s second quarter. Naturally, third and fourth quarter comparisons are expected to be more labored considering the 2020 recovery began picking up steam in the second half. (On the same basis, some believe earnings gains in 2022 will have tougher comparisons versus those in the coming quarters of 2021. Current spending plans for the rest of this year very much favor consumption with a lower investment value than productive capital expenditures.)

US stock markets are currently being held back by what one large US bank affiliated brokerage firm refers to as the 3 Rs= Rates, Regulation, and Redistribution. Some global investors, including those in the US, see foreign stock markets performing better than those in the US, as shown in the following table:

Stock Market Year-to-Date Gains

Canada        +20%

South Africa  +17%

France        +16%

U.K.          +15%

Taiwan        +15%

How to Improve Your Investment Processes

There are several ways to improve the various processes, unfortunately they require more work than  the sound-bite/pundit driven world would suggest. Often, the best communicator is more of a commercial success than a better investor. 

People like quick comparisons that lead to an ordinal ranking result, often leading to the identification of a leader at the peak of their performance. One of the more successful institutional investors, Marathon Asset Management, decries this approach in the following quote “categorization purposefully reduces complexity and nuances”.

Nuances are critical to the understanding of comparisons, no critical analysis of peers is simple and straight forward. The following is a list of categories: stocks, bonds, growth, value, return on sales, operating earnings, earnings per share, book value, and tax rates. On a personal level, what about our significant others, or the schools we chose to attend. What is missing in these comparisons is the attention to quality, sustainability, integrity, personality, and the fit within the existing structure or portfolio. I suggest statistical comparisons do not provide answers, although they are useful in framing important questions exploring the answers to the “soft” questions.

Another critical technique is to not pay more than once for the same positive. For example, the chance of success for a company developing a new product or service creating new customers and opportunities is generally priced into the value of that stock. However, that premium should be eliminated once the product is on the market and operating earnings from the new product are counted in current earnings. R&D is critical for many large companies to maintain existing earnings power, it is therefore not worth an added value.

Turnarounds can be great investments, but the key is understanding if they can keep adding value in the future or are one-trick ponies. Proxy statements are useful in this analysis. After a new CEO has been in place for about five years, the degree of senior management and director turnover provides a clue as to whether the heavy work of the turnaround is complete or ongoing.

While I would be happy to discuss other analytical techniques with subscribers privately, I will include one final critical analysis for portfolio managers. How a considered investment modifies the existing portfolio and at what cost.  A new investment will determine how the existing portfolio is modified and at what cost. Is the new investment going to reduce the chance of risk or add to performance in good periods? How much time will be needed to follow and deepen an understanding of the new investment? What is the appropriate starting position size and what are the likely points to augmenting the size over time? Are we comfortable with the other shareholders, both old and new?

Question of the Week: 

Have you modified your investment thinking in 2021? If not, are you likely to make changes before year end?   

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

https://mikelipper.blogspot.com/2021/05/faulty-comparisons-weekly-blog-682.html

https://mikelipper.blogspot.com/2021/05/extreme-views-can-be-good-lessons.html

https://mikelipper.blogspot.com/2021/05/where-is-stock-market-going-next-weekly.html

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.