What To Believe? - Weekly Blog # 778

Mike Lipper’s Monday Morning Musings

What To Believe?

 

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

 

 

Preface: Publishing with Intent 

One of the most useful screens used by investigators is guessing the primary intent of what is being offered by the supplier. The most likely intent is to get important consumers to take a specific action, or possibly to not act at all. When addressing an audience of one or more there is a presumption that the “pitch” is to reinforce already accepted consumer beliefs. This is a much more productive strategy for the publisher, as most “pitches” are designed to get the highest number to agree. 

 

As someone who learned to analyze at the racetrack, I feel the need to understand how the majority of the money is thinking about a particular horse, in a particular race, on a specific day and time. That horse is likely to have the most money bet on a projected result. The horse in each race with the biggest bet is labeled “the favorite”. The favorite has the largest percentage of the betting pool and by definition the smallest payoff odds. Favorites generally win more frequently than all other entries. However, they typically win less than half the time, in only about a third of the races. Thus, betting on the favorites does not generally produce enough dollars to make up for the losses in an eight or nine race card day.  

 

This has led me to a mindset of respecting the majority opinion, while choosing to either not bet at all, or to choose a horse favored less than the favorite. This approach has worked sufficiently well that I on occasion use it to bet on securities, choosing non-favorites or outsiders. 

 

This betting technique led me to look through the bulk of the information to understand where most of the money was being bet and if other choices made more sense. I have become a skeptic, which impacts my assessment of the media’s review of the first quarter equity results. 

 

The Favorites View of 1st Quarter Results 

 (N.B. The less than perfect technique of looking past performance for clues as to future results, or at least a better understanding of what is likely to happen.) 

 

These thoughts were before OPEC+ announced a million barrel per day cut and more later.

 

The first quarter of 2023 was viewed as victory for the stock market, with the NASDAQ Composite gaining +18.6 % from the beginning of 2023.  

 

(This view is what should separate the amateurs from the professionals. Markets move to their own rhythm, not to a stated calendar. Like many other market analysts, I measure markets from their highest to their lowest points. The record highest price for the NASDAQ Composite was achieved November 19th, 2022. If one looks at the change from the peak to the close in the quarter, the NASDAQ Composite is down -23.84%. This is significant, because some in the media are calling it a new bull market. I don’t think so, at least not yet.) 

 

There are at least two other statistical ways to see if we are on the immediate edge of a bull market.

1. The number of advances and declines in the last week. There was only one day in the week where there were more advances than declines on the NYSE, and only two on the NASDAQ.
2. Another way to look at advances vs. declines is to look at the percentage of listed stocks that were down for the week. On the “Big Board” 12.57% hit new lows, vs. 17.01% on the NASDAQ. (These are relatively high for the beginning of a new bull market.) 

Many market prognosticators believe a new market phase will be led by different stocks than in the past. For the month of March, the S&P 500 gained +3.67%, although the equally weighted S&P 500 lost -0.88%. The S&P 400 (Mid-cap) lost -3.21% and the S&P 600 (Small-cap) lost -5.16%. (Standard & Poor’s does have an S&P Asia 50 Index, which was up +6.05% in March. 

 

Big Risk: Correction Delayed 

While I doubt we will escape a recession between now and the next Presidential election, we may. However, much more concerning to long-term investors is the need to make major corrections in the economy and society. The following is a list of issues that need to be addressed: 

1. The Federal government needs to stop creating more inflation. It needs to cut expenses and lower restrictions on businesses, which hurt low-income people. For example, reshoring raises the costs to consumers. The bailout of banks through the FDIC raises bank fees, which in turn will lead to fewer low-priced services. Restrictions on energy pipelines increase the cost of almost everything that is transported, even before Sunday’s announcements.
2. Encourage IPOs – Only one of the last 20 Global IPOs was in US dollars, 12 were priced in Chinese Renminbi. 
3. Global lending is down -28% to a 7-year low. Acquisition related financing is down -71%, to 13-year low.
4. Improve management selection in government, non-profits, and business – Choose people with superior operational rather than political skills.

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Copyright © 2008 – 2023

Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission

 

 

Question of the Week: Have You Identified the Upside for you?  

 

 

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Mike Lipper’s Monday Morning Musings

We Allow Our Investment Professionals to be Lazy

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

  

 

 

The Indictment

Short-term investors are often confused with speculators. While they may produce the most trades, long-term investors own the most securities. This is why the financial media is jammed with views of short-term consequences, e.g., the next announced move and statement of the Fed.

 

Whatever the Fed does, the impact on long-term assets will be minimal at best. The key numbers for long-term investors in declining order of importance are:

1. The purchasing power in local currency at the planned terminal date.
2. An discounted valuation caused by a premature sale.
3. Third is the aggregate value of distributed income while the asset is held. This could conceivably be larger than the first case on very long-held assets in a generational transfer.

Most pundits would rather pontificate about near-term prices than speculate on the three long-term numbers which are difficult to guess and won’t be known until many years in the future. These very long-term guesses are however what owners need in selecting the current assets that should be owned. While it is almost impossible to determine the exact future valuation, it is possible to come up with relative value ranges. In many long-term portfolios there are bonds and other securities with contract relationships. What is far from certain is the price and value of these instruments.

 

Historically, possibly bigger but more uncertain returns are earned from risker equity investments than from more predictable bond-like instruments. Bonds are also characteristically less volatile, but can only possibly recover their face value plus interest.

 

Nevertheless, the lure of higher potential returns attracts investors to equities and with it higher compensation for the advisors involved. This is the ballpark I choose to play in. To do so I take the inherent risk of attempting to make reasonably accurate projections regarding the relative performance of various equities and equity funds.

 

The Playing Field

As most of our clients are US dollar-based investors my primary interest is in US activities and how non-US actions impact US beneficiaries. The following is a list of primary concerns I have about the future of the US from an investment perspective. These current conditions are rarely discussed by the popular pundits.

1. Productivity is declining, which means the US is producing less sales and profits for each dollar of investment or hours of work. Productivity translates into long-term price gains in the marketplace. In last week’s blog I noted that the S&P 500 Index had gained an annualized return of over 10% since 1871. Prior to Covid the S&P 500 rose 9% per annum. We are growing even less this year. Depending on which prediction you choose, the expected gain is between slightly above zero and 7%. My guess is that “social spending” by industry and government has cost us at least one percent. The FTC, reshoring, and energy policies are likely costing at least another 1%.
2. We have lost the drive to win a war and the related peace after our conflict in Korea, Vietnam, Iraq, and Afghanistan. Our military now has a social mission, not primarily a military mission. To win we must want to win. Our current military is underfunded and not structured to win.
3. Excluding immigrants, we like China, are not growing our native-born population. This is not going to help improve productivity. Before 2050 India will have the largest population and by the turn of the century, Nigeria and possibly another African country will likely be the leader.
4. We are likely to see a new generation of global political leaders, possibly with more authoritarian tendencies. US industrial and commercial leaders will also change.
5. US schools are producing a generation of students who do not want to work hard and effectively. Our leading STEM oriented universities will produce good managers for a while, although some of the best will leave. That is too bad. Note the number of top leaders who are foreign born or first-generation Americans. We shouldn’t lose these leaders, we need them to replace some of the current politically adept CEOs.
6. China is likely to remain the fulcrum of world growth, they work harder and smarter.
7. From an investment standpoint, private companies are growing faster than public companies due to leverage and incentives. Incentives eventually lead to these companies becoming publicly owned, which requires public markets to not be overly burdened by government policies.

 

Restructuring How We Do Things

(The following is just one example of what may occur)

Our medical/insurance complexes have become gigantic bureaucratic political bodies, where patients are cogs in a machine. For instance, a patient living in the UK who has been in remission for over 2 ½ years is likely expected to return to the East coast to see his doctor every six months. Why can’t he go to a UK medical location and electronically tie in with a US facility. If these types of arrangements can’t be worked out, the real estate implications are enormous.

 

These are the types of changes we are looking to invest in.

 

Brief Initial Thoughts on Silicon Valley Bank and Credit Suisse

Both were victims of their own business mismanagement, poorly informed clients, and poor government/industry regulation. I wonder in the long run if our society is better off letting them fail rather than partially bailing people out. I don’t know if the victims learn anything. More importantly, do investors in general learn to be more careful. I am most concerned by the last group.     

 

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Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.