Both Elections & Investments Seldom What They Seem - Weekly Blog # 860

 

Mike Lipper’s Monday Morning Musings

 

Both Elections & Investments

Seldom What They Seem

 

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

 

 

  

Gilbert & Sullivan nailed it when they titled one of their songs in H.M.S. Pinafore “Things are Seldom What they Seem”. This title should be attached to every article that discusses the investment implications of the next election and future elections. Currently, almost all the chatter is about the Presidential election, which also gets exclusive attention overseas. This is naive in the extreme for the following reasons:

1. Whoever is going to be sitting in the Oval Office will not likely be there for another term. Thus, they will likely have limited political power on Capitol Hill.
2. The House must start all tax and spending bills and both parties are split along ideological lines.
3. The Senate, with 6-year staggered terms, requires critical legislation to be passed by 60 votes. They wish to terminate the filibuster rule. Politically, the senate is even more divided than the house. Additionally, a number of senators are interested in having a seat in the White House and they typically have larger financial estates than members of the House.
4. Both political parties believe Washington should dictate what Americans purchase by using grants and tariffs. (Democrats favor “EVs” and labor union produced voters, while Republicans seem to favor tariffs. Our economic history shows that countries supporting consumer choice grow faster and sounder.)
5. With deep divisions on Capitol Hill and changing legislative leadership, including the chairs of committees on the Republican side, it is going to be difficult to get bills passed.
6. The role of the Supreme Court will be critical. The present Court believes it is responsible for determining when cases comply with the written Constitution. This Court decided that a prior court decision on Roe vs. Wade was unauthorized. The issue was not about abortion, but whether the “Warren Court” 50 years ago sanctioned abortion under the Constitution. The Founding Fathers limited the powers of the Federal government to those items specifically enumerated in the Constitution, leaving all other decisions to the individual states.   

 

Possible Peak Two Fridays Past

Some investors are more focused on their long-term investment responsibilities than political decisions. However, too many economists have become mathematicians and too many political scientists have become statisticians.

 

Some of the signs that all is not well:

1. AAII’s weekly sample survey of investor sentiment changed dramatically. Two weeks ago, there was 20 percentage point advantage in favor of the bulls for the next 6 months. In the most current week, this position shrank 7% points.
2. The weekly share volume on the NYSE declined 42,209 shares, while NASDAQ volume rose 3,034,261 shares. (Considering prices fell during this period, the increase in volume is bearish.)
3. Standard & Poor’s tracks 32 indices weekly and only 1 rose last week, by only 0.05%.
4. The underwriting of speculative bonds rose sharply in late September and thus far in October. The sharp increase in underwriting was well beyond the need to refinance existing debt. This suggests savvy speculative bond issuers see higher rates ahead when they need to sell more debt.

 

Question: How do you see interest rates in late 2025, 2026, and 2028?

 

 

 

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Mike Lipper's Blog: Melt-Up, Leaks, & Echoes of 1907 - Weekly Blog # 858

Mike Lipper's Blog: Stress Unfelt by the “Bulls”, Yet !! - Weekly Blog # 859

Mike Lipper's Blog: Mis-Interpreting News - Weekly Blog # 857

 

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Our Self-Appointed Mission - Weekly Blog # 846

 

         

 

Mike Lipper’s Monday Morning Musings

 

Our Self-Appointed Mission

 

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

 

 

 

“The World Turned Upside Down” 

“The World Turned Upside Down” played as the British Army marched off the Yorktown battlefield, ending the last military action of the American Revolution.

 

The Sunday announcement caused me to kill the draft of the intended blog for this week. 

  

With the letter announcing the end of President Biden’s campaign for a second term and his endorsement of Vice President Kamala Harris for President, the whole focus of what is important to investors changed. These events made me contemplate the meaning of the British army signaling the end of their military operation in America on October 19th, 1781. 

 

The rest of the world recognized that the US had become a world power one hundred and ten years later, on the 10th of December 1895, when the peace treaty ending the Spanish American War was signed. The US became a Pacific power for a while with their occupation of the Philippines. During the time from the end of the American Revolution and the end of the Spanish American War there were other wars, including the bloody Civil War. 

 

While I cannot determine what the critical events will be, or when they will happen, I expect it won’t be a smooth process. The Democrats are likely to form a circular firing squad. The Senate will be the center of power, surrounded by Governors, the money groups, and others who can make things happen from a protected position in the final run.      

 

Somewhat later the Republicans are likely to have their own internal battles between their top-down and bottom-up factions. 

 

While foreign governments and their internal forces were already influencing US activities and having an impact on US actions, it is more the case now. In the past it was the Europeans who played this role. Now the Asians will be the change agents. With President Trump’s desire for a weaker US dollar, he will have to successfully deal with China and Japan’s internal problems and also their trade with us. They are the two largest holders of dollars. China has grown twice as fast as the US for some time, although they are now close to a contraction. Due to changes in government philosophy, Japan needs to increase international trade. 

 

There is an increasingly large gap between the politically oriented stock market players and operating business managements. Quite possibly, the enthusiastic market players are going to wait to see how the following events play out, the attempted assassination of President Trump, the withdrawal of President Biden for his second term, and his endorsement of his Vice-President to replace him.

 

The US growth rate of consumer sales has been in decline for some time, causing executives to cut employment and dispose of less attractive operations. Companies have also had to juggle prices, quality, and the packaging of smaller quantities at old prices. 

 

Preview: 

I was preparing a piece on asset sector fund performance that I hope to finish if the world settles down. Past performance will likely be an aid in future selection. Perhaps next week. 

 

 

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The Course to Explain Last Week - Weekly Blog # 787

 

Mike Lipper’s Monday Morning Musings

The Course to Explain Last Week

 

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

  

 

 

Understanding Your Location

Almost all the news events of the last week are better understood if you appreciate the critical functions created by geography. At one time a whole course on geography was part of an early primary education, followed by a course on economic geography in middle school. These courses were pushed out to make room for social topics better fitting the educational establishment’s political views. No wonder so many of the current population were misled by the actions last week.

 

Where the Cities Are?

As populations grew, many benefitted from the values offered by schooling, medical services, education, entertainment, and political practices in towns and cities. Early cities were mostly found around strategic waterways, oceans, seas, lakes, and rivers. It’s no coincidence downtown locations attracted merchants and others. For hundreds of years financial and merchandise centers grew up around seaports such as New York, Boston, London, and Tokyo. To this day, the largest city in most countries and states remain these centers. Not surprisingly, to counterbalance the political powers of these cities, some political forces established state and national government sites away from the commercial centers e.g., Albany, Annapolis, Brasilia, Canberra, Sacramento, and Washington D.C.

 

We are all aware The President of the United States compromised and signed legislation into law on Saturday. He temporarily raised the debt limit and modified the growth and make up of appropriations. The result was only possible because DC has a different power currency than the dollar-based currency driving the rest of the country.

 

The power currency as exercised on Capitol Hill represents votes in the Senate and House, with the occasional interaction of the Presidency and Supreme Court. If their currency was in the commercial world, it would have been fairly easy to measure the dollars to be spent or not to be spent. This weekend both the Democrats and Republicans are claiming great victories. The problem is that the math is questionable, as are the policing impacts on the agreements. Regardless of the academic debate, the value of the concessions were too small.

 

There will possibly be a longer lasting victory benefiting society in the future, as these bills were passed by votes from “centralists” on both sides who resisted the impassioned pleas from the extreme members of their parties. We can build on the small progress made this week to make larger changes in the future, as long as those in the center learn to trust and respect the centrist members of the other party. While I have not done the analysis, my guess is that most who voted to pass these bills came from commercial backgrounds and are used to working to get compromises.

 

A Much Bigger Issue Was Not Discussed

Whether we like it or not, we are all globalists. Most of the threads in our clothes and some of our favorite foods come from overseas. The producers of these goods, as well as the militaries of our allies are paid in US dollars to protect us. We also sell a lot of our products and services to them. The US represents roughly ¼ of world trade. Problem is, the US dollar is the medium of exchange for ½ to 90% of currency exchanges depending on how you measure it. The US dollar is currently the most trusted currency. This translates into the lowest cost to buy products and services relative to other currencies who must pay a premium for the same purchases. This is an extraordinary privilege.

 

The privilege is not granted by an authority, but by the perceived purchasing power of the dollar through a collection of transactions each minute of each day. In general, it is assumed the relative purchasing power is stable compared to other currencies.

 

Perceptions are normally slow to change, but they can move at the speed of communication through transactors in a 24-hour marketplace. In a microcosm of how the market can work, examine the run on the SVB. Most of the loans and deposits were from the “silicon-valley” venture-oriented community. Many of these companies had critical shareholders who were active participants in the community, something the bank and regulators did not fully appreciate. I suspect the run on that bank was started by a few comments within this high-pressure group. The daily foreign-exchange community is much, much larger than SVB’s critical players, although it could follow the same communication, concentration, and contagion pattern. (There is no single Federal Reserve Bank for currencies.)

 

Possible Causes

Most powerful trends initially move at glacial speeds, until they take-off in hypersonic movements. The slow deterioration essentially reflects a slow growing decline in confidence and is often a collection of small actions. Some examples are listed below:

• A poorly executed withdrawal from Afghanistan by more isolationist new leadership.
• A shared belief that China permitted COVID to escape.
• Domestic pump priming and an unwise explosion of cash generation, unleashing inflation on the world.
• A weak response to a border war, with the inability to rapidly supply US Tanks and F-16 planes for coming offensive in Ukraine.
• In addition to government management problems, US industry leaders like JP Morgan, Goldman Sachs, Apple, and even the SEC, have had management issues that led to public errors. These are not confidence builders.

 

Barron’s Suggest Another Concern

In a four-page article in this week’s Barron’s they suggest loosely regulated non-bank financial organizations could have surprising credit issues. If you add up all the credit and equity extended to individuals, businesses, and organizations, it is about equal in size to the assets/liabilities of the regulated banks. Insurance companies, retirement plans, private capital providers, family offices, investment advisers, and brokerage firms have some narrow regulatory oversight. However, there is no single body reviewing the impact of bailout capital on the broader global economy.

 

I am not sure I want to see a super-agency overseeing the non-bank financial sector. However, it might be useful to have coordinated data collection and similar transaction management principles.

 

Conclusion:

I am unclear as to what the intermediate future will look like and appreciate any thoughts.

 

 

 

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A Terrible Week - Weekly Blog # 772

 

Mike Lipper’s Monday Morning Musings

A Terrible Week

 

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

 

 

 

A Blogger’s Point of View

Everyone reacts to stimuli based on their physical, financial, and emotional perspective. Considering these filters, I had a rough week. While I almost always have views, I try to base them on facts. I found little in the way of published facts supporting or completely opposing my views. Therefore, to quote my arts photographer, I opened up my aperture to give more credence to a widened field of inputs. Some may refer to these as collateral notions, but in the absence of convincing evidence they will have to do.

 

Quality of Information

In the US Marine Corps, we were instructed to value our inputs in terms of accuracy and creditability when planning to engage the enemy. I find this type of information missing from most publicly available statements about the future, although there are occasionally some pre or post warnings to be found. This week there were two such notices concerning topics about future budgets and pandemics.

 

The Congressional Budget Office (CBO) regularly publishes estimates about future budgets related to Gross Domestic Product (GDP) and the Demographic outlook. (One problem with both studies is that accuracy in the past has been wide of the mark. In spite of that, they presented a single number answer in their projections. I question the precision and credibility of the single number. For example, their stated deficit for 2023 is $1.4 Trillion and between ‘24 and ’33 it will average $2 Trillion. As this is perhaps the single most important number for those who pay their salaries, I would be more impressed with a range and a description of what might cause the difference. Personally, I would doubt an estimate in the exact center of the range.)

 

Furthermore, while the demographic study shows a decline in population, it is my guess that a good psychographic study would show an even worse outlook concerning the number of hirable people and their willingness to work.

 

Perhaps the biggest blow to the creditability of government estimates and actions are summed up in the following headline “Fauci Changes His Public Tune on Covid Vaccines”. In an article in “Cell Host & Microbe Journal, Dr Fauci wrote that vaccines against respiratory viruses provided “decidedly suboptimal” protection against infection and rarely produced durable, protective immunity. (I am not qualified to have a medical opinion. I certainly don’t know whether they hurt and probably will continue to get shots if my doctor recommends them.)

The key lesson from these inputs going back to my USMC training is to evaluate inputs based on the sources of the input. In these particular cases both were paid for by a government apparently in need of political help, meaning they should be viewed with skepticism while searching for other “facts” or properly labeled opinions.

 

Application Analysis

Investors love numbers, but often don’t apply carefully with constraints in making investment decisions. The following is both a summary of the data and my applications of the input.

1. The longer the period measured, the smaller the downside. (It is best to invest for the long term, there are very few periods of 20 years or longer where it hasn’t paid to invest in a portfolio of stocks. - Losers are not around for the full period.)
2. Historically, when an inverted 2-year US Treasury yield is higher than the ten-year yield for more than 100 trading days, 10-year yields peak. The current inversion has existed for over 160 days. (Either the old formula doesn’t work anymore, or the drop is going to be large.)
3. In the minds of investors, most stocks traded on the NASDAQ are more growth oriented than those on the NYSE and many are considered to be speculative. NASDAQ investors are not normally more patient than investors favoring NYSE issues. Additionally, there are fewer passive investors owning NASDAQ stocks. Last week 61.8 % of the shares traded on the NASDAQ fell, vs. 53.7% on the NYSE. (Speculators tend to sell more quickly than investors, as they sense price problems more quickly. – Hint, the stock market sold off later in the week because participants finally believed the Fed was probably not going to lower interest rates this year. Even though many growth stocks are not highly indebted, the larger the number of years used to value earnings growth, the higher the valuation.)
4. There are 20.8 million employees in goods producing firms and 129.6 million in service providers. (In an attempt to reduce inflation, the political establishment is focusing on the sales of goods producers instead of service providers. However, these politicians probably are more likely to be Democrats.)
5. One of the most interesting aspects of the week was the rise in John Deere’s stock price. They announced rising earnings, declining supply chain problems, lower industrial costs, and an increase in their own prices. (The timing of their price increase is curious. While I do not follow the company, a number of my old analyst friends had great respect for it. This made me think that this savvy management team might be afraid of political pressure to lower prices in the not-too-distant future and wanted to start out from a higher level.)
6. The weekend WSJ ran the following headline “Brace for the Richcession”. The article highlighted wages going up more than inflation for the poorest quintile of workers.  The other quintiles could be losing ground, not only in terms of relative wage hikes, but because their home prices and portfolios have peaked. Thus, the Richcession in the title. (I am not certain of the nature of the problems the editors were considering, but they may also sense an attempt to restructure society and therefor the economy.)
7. The biggest immediate problem facing America and other economies is China’s economy slowing down. Exports to China are critical to world trade growth.
8. I do not know how to measure it statistically, but I sense there is declining trust throughout our ecosystem. All relationships are based on trust, be they personal, political, or economic relationships. (While I and my accounts have been purposeful global investors for a long-time, as an odds-playing investor I get nervous when I see what occurred last week. One of our most speculative sectors, equity exchange traded funds (ETFs), had negative outflows of $783 million, while international ETFs had inflows of $1.9 billion. This makes sense tactically and is appropriate for hedging purposes, but it is not encouraging for our children, grandchildren, and great grandchildren.

 

Readers, please share your thoughts as to my views.     

 

 

 

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An Informative Week with Many Questions - Weekly Blog # 759

Mike Lipper’s Monday Morning Musings

An Informative Week with Many Questions

 

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

                   

 

 

CPI Thursday Morning Pivot or Rotation? 

The readings for the Consumer Price Index and its components were announced before the market opened on Thursday. They were not as high as many expected and market participants treated the less bad news as good news. Many chose to believe the less bad news would embolden the Fed to reduce the size of expected interest rate increases. In effect, the Fed was expected to “pivot”, messaging the market that inflationary increases would be reduced. Their enthusiastic response to the gap opening of the market was not narrowed on either Thursday or Friday.  

 

Market analysts believe that price gaps must be closed before the market can move in the direction of the gap. Most of the time this is the case, but not always. It may take a while. 

 

Market pivots tend to be infrequent, and partially reversed quickly. They can have limited long-term predicative value. However, they can be an early identifier of a meaningful rotation. In this case, the odds seem to favor this pivot not being a significant rotational change. My thinking is based on two inputs. 

 

1.  The mid-term election was largely motivated by a vote against the other side’s leaders and not by a vote in favor of positive growth strategies. Both parties have leadership problems. The Democrats have no fresh leadership with a significant following. The Republicans in some cases did not field attractive candidates and did not match the opposition’s operational talents. With the House of Representatives in the hands of the Republicans, I expect little in the way of new legislation. Many of the expected Executive Orders will also wind up in court. Stagflation will likely be the result. 

2.  Transactional volume will likely be less than expected in a normal bull market. Numerous brokerage firms, investment advisers, and investment bankers, are cutting back on lower producers or those too well compensated.

 

T. Rowe Price Lessons for Investors 

(The following discussion should not be interpreted as a recommendation. T. Rowe is an old personal holding. I have known its CEOs going back to Mr. Price. The firm is investing its capital on broadening its domestic and international marketing and is also developing new distribution channels. Doing so will take time and money to reach the firm’s desired profitability levels. A topic I can address off-line.)

 

T. Rowe Numbers for the Week ended November 11th

• Opened $103.71, closed $133.34 
• Monday-Wednesday share volume in millions of shares:  1.74, 1.85, 1.86 
• Thursday and Friday share volume: 4.49, 5.55 
• Weekly Price Gains: DJ Asset Managers Average +13.92%, T. Rowe +28.57% 
• Institutional Ownership 77.12 % 
• Top 4 shareholders own 26.62 % 
• Thursday’s gap of 5.48% not closed on Friday 

 

While the company is listed on the NYSE, it is essentially an institutional stock owned in some respect by competitors. The size of the price gap and above average gain demonstrates the lack of liquidity on the upside. I don’t know what the liquidity and potential price gap will be on the downside.  

 

Another hint of the professional market dominating the NASDAQ marketplace were the weekly declines as percentage of shares traded: 21.16% for the NYSE vs. 32.85% for the NASDAQ. 

 

Other Thoughts of the Week 

• The IMF believes 1/3 of the world is in recession 
• 7 out of 10 large battery producers are in China 
• With the 2-year and 30-year US Treasury yields at 4.32% and 4.08% respectively, it suggests the minimum expected return on high grade paper will be required for a long time by investors. Could it also mean that this is the maximum safe distribution from high quality accounts in order to preserve principal? 

 

Should real estate investing be divided between current income production and the conversion profits from changing the nature of the property? 

 

Historically, roughly half of small businesses fail within five years. Isn’t it likely this will increase during a period of stagflation? Small company investing has traditionally produced higher returns when large companies are having problems during a stagnant period. However, there will also be offsetting small-cap losses during the period. 

 

What are Your Thoughts? 

 

 

 

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Mike Lipper's Blog: Are You Getting Value from Numbers? - Weekly Blog # 758

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