Rising Risk Focus - Weekly Blog # 900

 

 

 

Mike Lipper’s Monday Morning Musings

 

Rising Risk Focus

 

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

 

 

 

                 

Friday’s Four-Letter Word

In polite society we are encouraged to limit the use of four-letter words. This could be the reason we try to not use them in the financial world, which is a disservice to our performance analysis and investment achievements. Thus, I am dedicating our 900th blog to articulating the key to our investment survival, risk.

 

Risk is the penalty for being wrong, although it is also critical to winning. Without risk there would probably be no rewards for winning. As Lenin said, “There are decades where nothing happens; and there are weeks where decades happen.” It is possible last Friday was one of those weeks. After an extended period of “melt-up” from mid-April, stock indices, driven by a minority of their stocks, fell by large single digits or more. The media attributes the decline to employment.

 

Employment

Employment encompasses both large and small numbers of people, including us. The impact of employment is much broader than the number of people being paid to work, it influences both production and sales. (In the modern world published data does not include people who work without pay. Furthermore, there is no published data on the quality of the work done, nor the quality of those who wish to be hired. For current employers with open job positions, it is the absence of the last unknown factors which raises serious questions concerning the likelihood those open slots will soon be filled.)

 

One problem with the employment data is that only about 60% of the organizations report their numbers to the government on time, catching up in subsequent months. Thus, adjustments are normal. The current period includes the fiscal year ends for state and local governments, end of teaching year, and the federal government shrinking its totals. Regular users of this data probably understand these issues and adjust their thinking accordingly.

 

Bond Prices

Many businesses, governments, non-profits, and individuals generate insufficient revenue to pay for their purchases each and every day. To the extent they lack sufficient reserves of idle cash, they often borrow. Depending on their size and credit worthiness they will use the bond or credit markets. Unlike equity which has an indefinite life, bonds or credits have identified maturities. Consequently, the providers of cash are very focused on the short-term outlook of the borrowers. Each week Barron’s publishes a couple of useful bond price indices, consisting of ten selected high-grade and medium-grade bonds each.

 

Barron’s found another use for this data when they discovered that medium-grade bond prices rose more than high grade bond prices within a year of the stock’s price rise. Stocks decline when bond investors favor high-grade bonds. On Friday, high-grade prices didn’t move while medium-grade bond prices fell (yields went up). This is a negative prediction on the future of the stock market.

 

The negative view is understandable, many of these credits belong to industrial companies. Another source of information is the ECRI, which publishes an industrial price index which tends to move slowly. However, by Friday that index had risen 3.6%, which will increase inflation. (I assume it was the result of the announced level of tariffs.)

 

Questions

Has the Administration in their planning adjusted their expenses for the enforcement of tariffs? I wonder if we will see increased smuggling across our borders if the tariffs stay on for long? Are we increasing the Coast Guards’ budget?  How much will Scotch sales decline and Bourbon sales rise?

 

Please share your views.

 

 

 

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A Contrarian Starting to Worry - Weekly Blog # 886

 

 

Mike Lipper’s Monday Morning Musings

 

A Contrarian Starting to Worry

 

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

 

                             

 

Misleading Financial Statements

First quarter earnings reports, led by financials, are generally positive. Good news if maintained often leads to rising stock prices, which is not what at least one contrarian is expecting. Nevertheless, comments and actions by decision makers at various levels highlighted those worries in April.

• In the wealth management industry, one is seeing an increase in smart firms selling out at good prices. These firms are being paid by companies who believe they need to bulk up rather than do what they do best.
• Some endowments and retirement plans are shifting to less aggressive investments or passive strategies, suggesting the intermediate future appears riskier.
• Buyers of industrial goods or materials are paying less than they were a year ago. The ECRI price index is down 8.08% over the last year.
• Active individual investors, or their managers, are predicting a worsening picture in the next six months. The American Association of Individual Investors (AAII) sample survey’s latest reading shows the bulls at 21.9% compared to 25.4% a week earlier.
• In April, 48% of businesses announced reduced profit expectations, compared with 33% in March. More concerning, 41% lowered their hiring expectations, versus 29% the month before.
• Fewer Americans are planning to take vacations this year. Those planning to take one are using their credit cards less, said American Express and Capital One.

We may get some useful commentary next weekend from the new Berkshire Hathaway Saturday annual shareholders meeting format. The somewhat shorter Berkshire meeting with different speakers maybe cause a day’s delay in sending out the weekly blog.

Since the middle of the last century, we have seen a growing concentration of investment firms and banks. In the first quarter of this year, Goldman Sachs, JP Morgan, Morgan Stanley, and Citi were involved with 94% of global mergers & acquisitions (M&A). With more structural changes likely to be caused by modifications in trade, tariffs, taxes, and currencies, the odds favor continued concentration. This concentration may well lead to increased volatility and a reduced number of competent financial personnel throughout the global economy. This is unlikely to make investing easier for some of us.

 

Question: Can you show us a bullish point of view where we can invest for future generations?      

 

 

 

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Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

 

 

 

Mike Lipper’s Monday Morning Musings

 

Increase in Bearish News is Long-Term Bullish

 

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

 

                             

 

Another Term for History: Uneven Cyclicality

In describing the behavior of people and other animals the terms of optimism and pessimism are appropriate, particularly the extreme emotions in overcoming risks. These actions drive all kinds of markets, including climates. Extreme increases and decreases occur irregularly, with people forgetting the pain caused by collapses.

 

We may currently be entering a negative economic cycle, possibly caused by an exaggerated political cycle. The biggest danger in focusing on the probable down cycle is retreating from a continued effort to search for early up-cycle clues.

 

A lawyer who practiced at a bank during the Great Depression mentioned that he hired workers every day to work on bad loans. During this period there were some activist investors who purchased defaulted securities, hoping to hold them for a partial or full recovery of face value. Some of the more well-known players were Ruth Axe, Max Heine, Ben Graham, and David Dodd, among others. Current conditions are not yet at this level of pain, but some smart people are examining the potential for such a period, both in the U.S. and elsewhere.

 

What is Happening Now?

Moody’s (*), in its latest proxy statement, predicted a continued multi-year decline. PIMCO is reluctant to buy long-term US Treasuries. Small and Mid-Cap stocks are dropping more than large-cap stocks on down market days because there is only liquidity in large-cap trades. This suggests that sizeable positions may have to be held until there is a sustained recovery.

(*) Owned in client and personal accounts

 

The two major consumer confidence surveys showed sharp drops in their March reports. One long-term negative factor facing the US is the relative unproductiveness of the entire educational process for investment capital. In the public school system, the number of administrators has increased eleven times the rate of growth in the number of students. (Sitting on a number University boards I have seen the same tendency at their level.) The mental health needs of the students have almost become a sub-industry. Many homes are not effective educational sites either.

 

What are the Investments Prospects?

As someone who basically learned analysis at the New York racetracks, I turn to the availability of numbers and ratios. Most dollars invested in equities are for funding needs beyond ten years. Consequently, I am using the median investment performance of the larger peer groups of mutual funds for the last ten years, as shown below:

    Large-Caps      8.50%

    Multi-Caps      7.92%  

    Mid-Caps        7.57%     

    Small Caps      6.82% 

    International   5.19%

(I think the overall range of 8.50% - 5.19% is a reasonable compound return for the next 10 years, considering the two years of 20% or more in the last 10 years. However, I don’t think the rank order of the peer groups will work out the same as it has in the past. Large-Cap performance is too heavily dependent on a concentrated group of high-tech companies. Small and mid-caps should benefit from buyouts and the movement of talent from larger companies to smaller companies. International funds may be the beneficiary of reactions to US government actions. I recently added Exor, the Agnelli family holding company, to my personal portfolio.

 

With so many controversial views expressed, I am interested in learning your view.

 

 

 

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Four Lessons Discussed - Weekly Blog # 877

 

 

Mike Lipper’s Monday Morning Musings

 

Four Lessons Discussed

 

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

 

 Farmers’ Experience Led to the Crash

Is 1930 a preview of 202x? To set the stage, the 1920s were a period of transition and economic expansion. America and most of the industrial world enjoyed meaningful economic progress spurred on by the encouragement of increased debt. Governments, companies, individuals, and farmers used the resources of others to leverage their assets with increasing debt, fulfilling their perceived needs at ever increasing rates. The lessons of the 50-years before WWI were distant memories.

 

Due to WWI mobilization, women entered the workforce in increased numbers. The returning military found farm work too hard and too poorly paid on the farms. Financial communities, which had extensive experience with debt and leverage, found vast new markets for the financial skills of banks and others. Thus, the missing manpower was replaced by expensive machines and chemicals, which led to farmers owning leveraged machines and farms.

 

The age-old problem with leverage is the cost-price spread abruptly narrows. In a world becoming increasingly more global, international trade becomes the fulcrum-point of the fluctuating cost-price spread. To protect those in the middle from price swings, tariffs and other restrictive measures were introduced.

The US consumer desired ever-increasing amounts of food, with much of it imported from lower cost countries. To protect home-grown crops, additional costs and restrictions were placed on imports. Exporting countries fought back by lowering their prices to a point where domestically produced products could not compete effectively. Consequently, domestic farmers got their elected politicians to impose tariffs on imports, like the Smoot-Hawley tariff that President Hoover was reluctant to do. (It was repealed three years later) Other nations reacted by imposing their own tariffs on US exports, which was a contributing cause for WWII. 

 

What will be the impact of the proposed Reciprocal Tariffs being proposed? Despite what is being said, it seems unlikely consumers will avoid some or more of the cost.

 

Learning from Uncle Warren

This weekend Berkshire Hathaway (*) published its results for the 4th quarter and all of 2024, along with a well thought out discussion. The company has four main revenue sources for the heirs of its shareholders. Berkshire has total or partial ownership of over 180 private companies and a smaller but better-known portfolio of quite large publicly traded companies. They also have an increasingly large portfolio of short-term US Treasuries, which increase in value as interest rates rise.

 

The difference between what their insurance companies charge and their eventual payout is called a “float”. In the most current period all earnings asset categories rose, except for the holdings of the publicly owned securities which declined because of sales. The total portfolio rose and is selling very close to its all-time high. Considering the company announced it is being managed for the benefit of today’s shareholder heirs; it is extremely appropriate to occasionally reduce its near-term market risks. (It is worth noting, the remaining two lessons in this blog suggest caution is warranted.)

(*) Owned in Personal and Client accounts

 

The Leading Mutual Funds Suggest US Risk

Each week I look at over 1500 SEC registered mutual funds, as well as many more in the global world. Usually, a number of different drivers describe the leaders of the week.

 

The list below shows the investment objective assigned to the fund:

Precious Metals Equity           21.04%

Commodities Precious Metals      11.86

International Large-Cap Value     8.60

International Mid-Cap Value       8.54

Commodities Base Metals           8.34

International Large-Cap Growth    8.24

Commodities Agriculture           8.15

Warren Buffet, among others, is concerned that the US government may cause the value of the US dollar to drop.

The year-to-date winners are not investing in the US.

 

“Debt Has Always Been the Ruin of Great Powers. Is the U.S. Next?”

 Above is the title of Niall Ferguson’s article in Saturday’s Wall Street Journal where he introduces Ferguson’s Law, which was crafted in 1767. The law states “that any great power that spends more on debt service than on defense risks ceasing to be a great power.” According to the author, debt service includes repayment of debt and defense includes all costs to maintain the military. The US has just passed this milestone, but it would take an extended period to fundamentally break the Ferguson Law.

 

Working Conclusion

Be careful and share your thoughts, particularly if you disagree.

 

 

 

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Inflection Point: “Trump Trade” at Risk - Weekly Blog # 862

 

Mike Lipper’s Monday Morning Musings

 

Inflection Point: “Trump Trade” at Risk

 

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

 

 

 

When Traveling We Often Don’t Know We Are Lost

As a portfolio manager for multi-generational accounts, it is critical to continually focus on the long-term funding needs of accounts, particularly when I am no longer around. In effect we are on a long march, which was part of my training as a USMC officer. (Most of our subscribers will read this blog on the 249th Birthday of The Corps) Rarely does a long march go in a straight line and each turn could be a minor change in direction. Alternatively, it could be a significant change in direction to avoid future danger. At some point a good Marine will recognize that we have passed a critical inflection point.

 

Our fellow investment marchers should be aware of a meaningful change in direction, speed of travel, and a different set of tactical moves. As an officer, it is my duty to consider changes.

 

Recent chatter from various investment pundits suggests there are various “Trump Trades”. Without making a judgement on each suggestion, I am willing to bet a year from now at least half those trades will not have worked out.

 

These trades are based on the 45th President’s actions and campaign comments. I believe no one knows what the 47th President will be able to get accomplished in his first year. We may think we know what he wants to do, but the world has changed both domestically and internationally and he doesn’t know for sure. Based on history, I am concerned about how Congress will follow direction. In many ways, both Chambers of the two major parties are split internally.  Just look at the number of announced caucuses and the potential number of informal voting blocks. Republican majorities in both chambers are likely be under 10 members. Furthermore, the incoming President did not do much to get many members elected. There are a number of Senators who see themselves sitting in The Oval office after the 2028 elections.

 

My portfolio management suggestions for protecting portfolio manager’s jobs are the following:

1. Divide the Trump Trades in half and hold one half for the next year.
2. With the second half, subdivide into twelve equal groups and sell one group each month for the next year.
3. Put the freed-up cash in an equal-weighted S&P 500 index fund if you must be invested, otherwise put the cash in a money market fund.

The above tactic is for short exposure but does not address the real problem.

 

Lack of Competent Leadership is the Problem

As a society Americans have become defensive about their own worth and their jobs. We seek to acquire the credentials that qualified us at some point in time for a particular job, “guaranteeing” that job and income. Once we have the credentials, we no longer need to compete. The longer the elapsed time from when we “earned” the credentials, the less talents we acquire. To offset this deficiency, we lean more on support staff. During WWII it required eight support people for every fighting man (mostly men).

 

This is true not only in the military, but also in medicine, government and schooling. (Note, I didn’t say education.) The larger the staff, the more bureaucratic the control systems get. (A classic example is the Ukrainian fighting people vs the Russian Army.) In general, the more people involved the less efficient the group gets and the longer it takes between promotions.

 

Our so-called educational system (school and university) has molded our workforce since the 1920s. The Communist Party thought that if they could control New York and other school systems they could impact the government, aided by the Depression. The key for union teachers was protecting their jobs by teaching-to-pass exams, both for teachers and students. They were not taught how to think. This strategy was remarkably successful.

 

These teachers trained many of the senior teachers who trained the senior college and university students of today, which explains the political efforts of the majority of teachers today. Trustees and Deans don’t control most of the critical choices of their schools. The faculty senate are the main decision makers, run on a seniority basis.

 

These are the people who are teaching the leaders of today and tomorrow in government, medicine, and business. They tend to favor large organizations, despite most progress in society originating from smaller groups.

 

Inflation is not the Problem

Inflation is society’s way of dealing with imbalances between current supply and demand. Attempts by a top-down government to control the urges of people to balance supply and demand are not useful. Every attempt to control these forces has enlarged grey and black markets, often summoned in regulated and expensive markets. Most supply shortages are due to government regulation for the benefit of friends of the government.

 

In Conclusion

If we have entered a new cycle, we may see a very different set of trends that we will need to understand and master. Any thoughts on how to manage long-term portfolios?

 

 

 

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Mike Lipper's Blog: This Was the Week That Was, But Not What Was Expected - Weekly Blog # 861

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

 

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This Was the Week That Was, But Not What Was Expected - Weekly Blog # 861

 

Mike Lipper’s Monday Morning Musings

 

This Was The Week That Was,

But Not What Was Expected

 

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

 

 

 

 “Trump Trade”, An Artifact of History

No one really knows which of the new administration’s critical rules and regulations will become law. Both presidential candidates have announced and unannounced wishes, but both are unlikely to get another term. They will have little ability to help various members of Congress win the ’26 or ’28 elections.

 

Unless there is a one-sided sweep of both Houses for the same party, the odds favor majorities in the single digits. While the rest of the world might think Congressional leaders will be able to command political discipline, both parties are split into multiple groups depending on the particular issue. Furthermore, in the Senate there are members who see themselves sitting in the White House after the ’28 elections.  Looking beyond the intramural games of the next four years, there are two elements of news that should be of importance to those of us selecting assets to meet the needs of longer-term investors.

 

The Declining Dollar

The CFA Institute Research & Policy Center conducted a global survey of 4000 CFAs concerning the future value of the US Dollar. The survey was conducted from 15 to 31 of July 2024. They published their findings in a white paper titled “The Dollar’s Exorbitant Privilege” (This is what the French President called the dollar years ago.)

 

A supermajority of respondents believe that US government spending is not sustainable. Only 59% of US Treasury investors believe the US can continue to borrow using Treasuries. (I remember there was a time when we created a special class of Treasuries for the Saudi Arabia, with an undisclosed interest rate). Neither of the two Presidential Candidates have announced any plans to reduce the deficit and both are unannounced pro-inflation. The respondents expect the dollar to be replaced by a multipolar currency system no later than fifteen years from now.

 

Some investors already recognize the risk in the dollar. Bank of America’s brokerage firm noted this week that 31% of their volume was in gold and 24% in crypto, as a way to reduce total dependence on the dollar. One long-term investor diversifying his currency risk is Warren Buffett. After doubling his money in five Japanese Trading companies, he is now borrowing money in Yen.

 

Berkshire Hathaway’s 10Q

As a young analyst I became enamored by their financial statements, long before I could afford to buy shares in Berkshire. In the 1960s I felt a smart business school could devote a whole semester to reading and understanding the financial reports of Berkshire. It would teach students about equity investments, bonds, insurance, commodities, management analysis, and how politics impacts investment decisions. (It might even help the professors learn about the real world)

 

On Saturday Berkshire published its third quarter results with a relatively concise press release, which was top-line oriented. As is required by the SEC it also published its 10Q document, which was over fifty pages long. Ten of those pages were full of brief comments on each of the larger investments. This is what hooked me, although I could not purchase most of their investments because they are not publicly traded. Their comments were in some detail, covering sales, earnings, taxes paid, expense trends, and management issues. The comments gave me an understanding of how the real economy is working. (Along the way I was able to become comfortable enough to buy some shares in Berkshire, and it is now my biggest investment.)

 

The latest “Q” showed that in nine months they had raised their cash levels to $288 billion, compared to $130 billion at year-end.  At the same time, they added $50 billion to investments. Perhaps most significant was that they did not repurchase any of their own publicly traded stock. A couple of years ago at a private dinner with the late and great Charley Munger, I asked him if I should value their private companies at twice their carrying value (purchase price + dividends received). Charley counseled me that everything they owned currently was not a good investment. As usual he was correct. In this quarter’s “Q” there were a significant number of investments that declining earnings or lost money. (I still believe they own enough large winners on average where doubling their holdings value would be reasonable.) If one looks at the operations of a number of industrial and consumer product entities, they themselves conduct substantial financial activities in terms of loans and insurance.

 

Is Warren Buffett’s Caution Warranted?

Some stocks have risen so high that they may have brought some gains forward, potentially reducing future gains. One way to evaluate this is to look at the gains achieved by the leading mutual fund sectors: Total Return Performance for the latest 52 weeks are shown below:

 

Equity Leverage       61.16%

Financial Services    46.38%

Science & Tech        44.13%

Mid-Cap Growth        41.28%

Large-Cap Growth      40.30%

 

I don’t expect all to be leaders in the next 52 weeks, as the three main indices (DJIA, SPX, and the Nasdaq Composite) have “Head & Shoulders” chart patterns, which often leads to a reversal.

 

Question: What Do You Think?

 

 

 

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Mike Lipper's Blog: Both Elections & Investments Seldom What They Seem - Weekly Blog # 860

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

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

 

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Stress Unfelt by the “Bulls”, Yet !! - Weekly Blog # 859

 

 

 

Mike Lipper’s Monday Morning Musings

 

Stress Unfelt by the “Bulls”, Yet !!

 

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

 

 

 

One measure of future dangers is the length of time identified stress points are ignored. Often, the longer the period of being unaware of increased risk levels, the greater the damage. The reason for this is that more assets are committed, so more damage is sustained. Somewhat like a pain in the mouth or heart.

 

The following stress points are in plain sight and should be diagnosed, even though some may not lead to sustained account damage or damage to clients’ capital. However, the real damage of a meaningful decline is often the lack of confidence to take advantage of the recovery. The following concerns are not in any particular order.

• Pet owners are trading down.
• PPG is selling their original business.
• As mentioned in the FT, “Corporate debts as credit funds allow borrowers to defer payments using higher cost payments in kind “PIK”.
• McKinsey is cutting their workforce in China.
• There is an assumption that the first Fed rate cut is the beginning of a rate cycle of lower rates.
• After all the government spending (election-focused bribes), the civilian labor force is only up 0.48% year over year, while government payroll is up +2.26%.
• Barron’s 10 high-grade bond yields declined -27 basis points compared to a gain of +8 points for medium-grade bonds. (Wider spread for added risk?)
• Consumer confidence fell 5.37 % last month.
• The percentage of losing stocks compared to all NYSE stocks was 1.7% vs 5.1% for NASDAQ stocks.
• Jason Zweig in the WSJ quoting Ben Graham “Investing isn’t about mastering the market it is about mastering yourself.” I agree and I pay a lot of attention to what Jason and Ben say. (I was given the Ben Graham award as President of the New York Society of Securities Analysts (NYSSA)).
• P&G noted that their customers in the US and China were switching to cheaper brands.
• In the 3rd quarter, American Express* had revenue gains of +8% and earnings gains of +2%. (A classic example of the cost to produce a revenue dollar becoming more expensive. (*A small position is owned personally.)
• Volkswagen is closing German factories for the first time since 1938.
• In Europe, some are starting to watch for disinflation. (Disinflation is much rarer than inflation and is much worse, as people reduce or stop spending.) 

 

Most current global political leaders are ignorant of micro-economics and thus can’t grasp macro-economics. They are not wholly responsible for this condition because their teachers didn’t understand them either. We will all pay the price for this ignorance.

 

 

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

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

Mike Lipper's Blog: Investors Not Traders Are Worried - Weekly Blog # 856

 

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Mis-Interpreting News - Weekly Blog # 857

 

Mike Lipper’s Monday Morning Musings

 

Mis-Interpreting News

 

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

 

 

 

Understanding Motivations Before Accepting

Investors and other voters should always search for the motivations of people or organizations distributing investment and political solutions. Most of those using megaphones recognize that only a small portion of their audience will react quickly to the pundits besieging them to make commitments of time, votes, or money. Peddlers consequently boil their pitches down into simple sounding solutions. (When have important considerations ever been made briefly?)

 

In terms of making decisions regarding investments, the media is full of quick and often wrong recommendations. For example, far too many investors have been informed that the rise or fall of interest rates, as determined by the Federal Reserve, is the key determinant of future investment performance and the growth of global economies.

 

As a trained sceptic and rarely a bettor on favorites at the racetrack or in other competitive games, I suggest interest rate changes result from the numerous impacts of identified and unidentified forces. I believe the following factors should be considered:

1. Remember, the Fed was created to replace the power of J.P. Morgan, the man, the bank, and the use of his locked library. During the Wall Street crash in 1907 numerous trust companies were failing, with still more expected to fail. Mr. Morgan called for a meeting of the leading bankers in his library. After assembling the bankers in the library, he locked the doors and stated he would not unlock them until all bankers committed funds to the bailout of a failing trust company that had made poor loans. The Washington government felt too much power was entrusted to one man. Relatively soon after they organized the Federal Reserve Bank. With an eye to public relations, they never specifically stated the real reason for creating the Fed, which was to reduce the risks of bank failures due to bad loans. Bank failures continue to be a risk in the US, and some have occurred in numerous other countries in Europe and Asia. Today, the Fed has supervisory power over a portion of US banks, which is their first order of business.
2. Demographics and Psychographics change slowly most of the time but have long-term impacts on our financial and political structure. An example is our falling birthrates and the fall in educational standards, which probably leads to declining productivity levels.
3. Both trade and military wars create imbalances, which in turn cause global economic changes.
4. Discoveries of natural resources and those made in a laboratory can cause economic and political disruptions Remember what the discovery of gold in Latin America did to the economies of Europe and America. The discovery of oil in the US and Saudi Arabia was equally disruptive of the status quo.
5. The personalities of leaders and managers are very different in terms of their focus on the short and long-term decisions.  

 

Since we don’t conduct in depth psychological interviews with a wide sample of the economy, we don’t know why people act the way they do. We tend to believe that events occur close to when decisions are made. This has led to following beliefs and their assumed stimuluses:

1. Clark Gabel’s appearance in a film bare chested killed subsequent undershirt sales.
2. After the movie Matrix 2, Cadillac dealers couldn’t keep large SUVs in stock due to sales demand.
3. The lipstick indicator and the length of women’s skirts were each believed to predict the direction of the stock market.

 

I don’t know what will cause of the next recession or depression, but one or more of the non-Fed rate cuts may be the first indicator of problems ahead and deserve to be watched.

 

Some Attention Should be Paid to the Following Factors

1. One of the causes of WWII was the US putting an oil Embargo on Japan. The same administration had our aircraft carrier leave Pearl Harbor without protective support ships in December 1941. (It was the planes from these carriers that led to a victory around Midway.)
2. More recently, there has been a 75% decline in commercial flights from China to the US. Most of the decline due to reductions by Chinese airlines.
3.  Around the world, bank depositors are moving up to half their money into investments, accepting the risk that goes along with it.
4. A survey of Japanese workers suggests that 25% will be searching for jobs in 2025. (Lifetime employment used to be standard in Japan.)
5. 20% of Indian retail investors are accepting risk.
6. Manufacturing has hired less people in three out of the last four months. Even more significant for our country is an increase in short-term consumption spending, not longer-term investment needs.
7. People have diverse views regarding investments and other expenditures. The prices for NYSE and NASDAQ stocks rose this week, while the plurality of bullish views declined in the AAII weekly sample survey. In the latest week, the bulls had an 18% advantage over the bears, down from a 26% advantage the prior week.

 

Please share your thoughts.

 

 

 

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Mike Lipper's Blog: Investors Not Traders Are Worried - Weekly Blog # 856

Mike Lipper's Blog: Many Quite Different Markets are in “The Market” - Weekly Blog # 855

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Many Quite Different Markets are in “The Market” - Weekly Blog # 855

 

Mike Lipper’s Monday Morning Musings

 

Many Quite Different Markets are in “The Market”

 

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

Main Motivations

No one invests to lose money, even if there is a clear chance of loss due to a decline in prices, inflation, or currency values impacting spending. To reduce the odds of disappointment one can diversify, which in theory reduces the risk of a total wipe out. (Except from a large meteor or similar tragedy.)

 

As the potential number of investments is so large, most people choose to narrow the list down to a manageable number. Very few people make the choice of investing in their own work, which could produce the highest lifetime return on work.

 

For the most part, diverse investments are packaged by marketing agents to make choosing easier and generate a profit for the marketer and her/his organization. To make their job easier during their limited selling time, they wrap their sales pitches with labels. The three most popular labels in the fund world are Growth, Core, and Value. Investments are not labeled by the issuer or the marketplace where traded. Although the distribution and administration processes are significant, they are governed by economics. (If one can sell the same product many times, the marketing and administration cost per sale can be smaller than the distribution/administrative cost for selling only once.)

 

The main motivation for investors, after making money, can be summed up under two categories. Excitement & Entertainment and Generating Capital/Income for future spending. Many traders interested in the first category judge the market by following the Dow Jones Industrial Average (DJIA), along with the volatility of the Nasdaq Composite Index. Serious investors attempting to earn capital and income over extended periods focus more on the Standard & Poor’s 500 Index (S&P 500).

 

The biggest risk in owning any security is not the issuer or its traded market, but the risk created by one’s co-venturers. If a large enough number of investors panic, they can pierce a chart’s support levels and bring on more selling, which could bring on even more selling. If the stock is critical to the forward momentum of the market, the price action could end the current phase of the market.

 

Understanding Data

It is critical to understand how large-cap funds perform, because they not only have the largest earnings in the fund business, but in aggregate probably represent the largest allocation of investors’ money. (Large-Caps represent at least 80% of the general equity in stocks.) Excluding sector funds and global/international funds, large-cap funds represent 33% of assets invested in mutual funds, with growth funds accounting for $1.55 trillion, core funds $1.09 trillion and value funds $0.66 trillion. When I created fund measurement data, I found it useful to look at the totals three ways; weighted, average, and median. The resulting numbers are meaningfully different. Growth funds year-to-date to September 19th show a weighted average return of +17.79%, an average return of +14.61%, and a median return of +13.48%, for a spread of 4.31%. In the small-cap peer group the spread was only 0.54%, showing the impact of size on the results.

 

Impact of Universes

Through the end of the latest week the volume of shares traded for the year was up +12% for the NYSE and 31% for the NASDAQ. In terms of advances/declines, 69% of NYSE stocks rose while 59% rose on the NASDAQ.

 

Hunting Grounds

I was trained to look for badly performing stocks that might be big future winners. In looking at poorly performing fund sectors two sectors caught my attention, China Region and Dedicated Shorts. Both have produced five-years of loses.

 

It has also been useful to reduce commitments when a sector is changing its source of new capital. Private Equity funds are now growing in popularity with the retail crowd of advisors and their customers.

 

Conclusions:

Be careful, many investments are likely much closer to their next five-year’s highs than their five-year lows.

 

 

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Mike Lipper's Blog: Implications from 2 different markets - Weekly Blog # 854

Mike Lipper's Blog: Investors Focus on the Wrong Elements - Weekly Blog # 853

Mike Lipper's Blog: Lessons From Warren Buffett - Weekly Blog # 852

 

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The Strategic Art of Strategic Selling - Weekly Blog # 850

 

         

Mike Lipper’s Monday Morning Musings

The Strategic Art of Strategic Selling

 

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

 

Playing the Game to Win

Playing baseball, producing a great painting, or writing a great piece of music, depends on many moves beyond a single swing of a bat, a great color, or a single melody. It is the same managing an investment portfolio. Amateur investors often evaluate two to hundreds of individual securities to choose a single security to sell.

 

Investors acting as long-playing professionals consider a myriad of factors in making the decision to sell a portion of their assets. The sole decision should not be based on the odds of the price of a security rising or falling a meaningful amount in a significant time period. The purpose of this blog is to examine the other factors one should consider.

 

A well-considered security contributes to the rising or falling of prices for the entire portfolio, in part as a result of its weight in the portfolio. Some managers may want to equal weight their components, but time creates changes in weighting. Other managers may choose to heavily weight some positions or have a portion of their portfolio as a "farm-team". This allows them to avoid missing the right idea, without making a significant commitment. One way to reduce daily volatility is to have a large number of positions, at the expense of near-term performance.

 

Other ways to examine a portfolio is to evaluate the risks the portfolio manager chooses to take. These include some of the following:

Inflation

Foreign Exchange

Political Risk

Critical Personnel

Legal Concerns

Tax Risks

Concentrated Personality Risks

Engineering and Manufacturing Risks

Other Risks

 

One of the bigger risks is owning too many speculative stocks with inexperienced shareholders. Warren Buffett, in managing Berkshire Hathaway (*), adjusts the size of some of his larger positions and/or hedges some holdings with others.

(*) Positions held in managed and personal accounts.

 

Some Clues in Plain Sight

• Industrial prices, as measured by the ECRI, are slightly lower than a year ago.
• The implications of having large short positions may not be as negative as it appears. Some of these may be short against the box.  (Short position offsetting similar long positions. Possible examples are Franklin Resources 7.72% and T. Rowe Price 4.21 % of float. Both are held in personal and client accounts)
• There are approximately 5 times the number shares traded on the NASDAQ vs the NYSE. This suggests that in a low-volume week the remaining trading interest is speculative.
• Studies indicate tariffs are inflationary and will lead to declines in employment, growth, and competitiveness.
• James Mackintosh, a WSJ columnist, suggests the market is very expensive using 3 measures of CAPE adjusting for inflation the S&P 500, and the Fed model. (If one looks at long-term rate of gains performance records. They decline over time, the longer the period the lower the rate of gain and are below the spectacular performance of high-performing stocks. This probably means large gains now are eating into longer-term performance results.

 

Question: Does anyone see parallels to the period between the assassination of the Archduke and the beginnings of the actual conflict and starting WWI?

 

 

 

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Mike Lipper's Blog: Investment Second Derivative: Motivation - Weekly Blog # 849

Mike Lipper's Blog: Fear of Instability Can Cause Trouble - Weekly Blog # 848

Mike Lipper's Blog: Detective Work of Analysts - Weekly Blog # 847

 

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