Showing posts with label Tech. Show all posts
Showing posts with label Tech. Show all posts

Sunday, December 22, 2024

Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

 

 

 

Mike Lipper’s Monday Morning Musings

 

Three Rs + Beginnings of a New Cycle

 

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

 

 

 

Three Rs Describe the Week

The first part of the week in terms of transaction volume on the NYSE + NASDAQ looked somewhat normal, but by midafternoon the world changed. We got the expected ¼ percent cut in Fed interest rates. However, during the press conference Jerome Powell stipulated his lack of confidence in the intermediate future outlook for Fed actions. As the conference went on, selling accelerated. By the closing bell many stocks had fallen, then some fell between 3-5% or more in the after-market. Interestingly, Thursday saw little movement. Trading volume for the first four days of the week was 4.72 million shares. On Friday there was news of one indicator showing inflation likely to decline, which was greeted with 8.13 million shares traded mostly on rising prices.

 

This was the first R, demonstrating the trader’s recalibration of inflation estimates, showing particular strength in techs and high-quality bond prices crunching.

 

The second R saw a further breakdown in the reversal chart pattern of the DJIA and DJTA. (Chart reading is an artform and is not accurate all the time.)

 

The third R, the need to deal with reconciliation of the budget, was perhaps the most significant and became known on Saturday. The final votes in favor were impressive. The House voted 366 to 34 in favor and the Senate 85 to 11. This proved my earlier view that there was no real landslide for President Trump. The American people don’t want much legislation or many executive orders.

 

What Does This Mean?

We live in a world where:

  • Most governments are tolerated or downright unpopular.
  • Technology appears to create more problems.
  • People are afraid of both political and corporate leadership.
  • The education sector can’t even run its own campuses safely. They are producing unemployable and over-privileged people only ready for “C-suites”.
  • Hard science is not providing much help for the soft science needs of the population.

 

Several examples of not understanding labels hit me this week, emerging markets and large global companies dominated by the five largest firms. The largest firms are attractive because they are exporters to large markets. Thus, to be successful one must be global.

 

Another example is the published list of the 15 best and worst mutual funds. If you are a large investor, the list is misleading. Of the best performing funds, 13 funds were from large fund families, whereas only 6 funds were from large fund families on the worst funds list.

 

Even with AI people need to think more thoroughly.

 

Please suggest what you think the next cycle will look like. 

 

 

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

Mike Lipper's Blog: Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

Mike Lipper's Blog: It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

Mike Lipper's Blog: Professional Worry Time vs Amateurs’ - Weekly Blog # 865



 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

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Sunday, April 14, 2024

Better Investment Thinking - Weekly Blog # 832

          


Mike Lipper’s Monday Morning Musings

 

Better Investment Thinking

 

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

   

       

 

The late and great Charlie Munger gave Warren Buffett his greatest compliment when he called him a “thinking machine”. His compliment implies that Warren is always thinking and trying to improve his investment process. In last week’s post-script at the end of the blog I introduced the concept of needing to focus on the process of selling. Early this week I had a conversation with one of the more perceptive members of a monthly investment discussion group. He was concerned that they hardly ever discuss the process of selling.

 

Selling is often prompted by the need to raise cash or the need to free up cash for reinvestment. Currently, we have quite possibly entered a period where it would be prudent to develop a meaningful cash reserve for later equity reinvestment. Admittedly, it runs the risk of not fully taking advantage of the rising stock market.  It is with that thought in mind that I am introducing the thinking of Professor George M. Calhoun, with some concern as to the structural risk it might expose.

 

George’s views have been shaped by the following experiences.

  • For 25 years George worked for various tech companies.
  • He is a Professor at The Stevens Institute of Technology, where I am one of the trustees.
  • At Stevens, George supervised the development of the Hanlon Financial Center, a live trading room.
  • He won a National Science Foundation award for creating the Center for Research Toward Advancing Financial Technologies (CRAFT).
  • George is a regular contributor to Forbes.


George Calhoun has written extensively on the causes of inflation, in discussions on: Dangers created by Money Market Funds, Cash Shortages, Recession Signal, Dry Powder, and Contrarian Indicator, parts of which are included in the link to the article below.

 

 

Collateral Damage From Fed Policy (3) – Money Market Funds, A ‘Powder Keg’? (forbes.com)

 

 

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

Mike Lipper's Blog: Preparing for the Future - Weekly Blog # 831

Mike Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830

Mike Lipper's Blog: Fragments Prior to Fragmentation - Blog 829

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

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Sunday, April 7, 2024

Preparing for the Future - Weekly Blog # 831

          


Mike Lipper’s Monday Morning Musings

 

Preparing for the Future

 

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

   

       

 

The fundamental job of an equity investor and manager is to grow current assets to fulfill future needs. Since we don’t know what the future will be or when it will be, we should consider a range of possibilities. My training at the racetrack and the US Marine Corps supports viewing the various futures through the various lenses of security analysis. I cannot think of a more difficult set of conditions than those facing us today.  

 

The possibilities range from the outmoded thinking of present world autocratic senior leaders (Biden, Trump, Xi, Putin, and similar) to unknown people with more scientific knowledge, but little management experience. To use an expression from the track, the odds-on-bet for the foreseeable future is that our present leaders will leave the scene relatively soon. They will probably be largely replaced by leaders two generations younger, who think differently and whose mental languages are different than what we have learned. 

 

Allow me to show you a mathematical approach from my world of mutual fund analysis. My old firm continues to report the weekly performance of mutual funds broken into seven investment objectives based on the securities in their portfolios. Most of the assets are in US Diversified Equity Fund investment objectives, which are divided into 18 peer groups. In the first quarter of 2024 there were 5 peer groups where the average performance was double digits. Interestingly, for the ten-year period there were 6 peer groups with double-digit winners. Four out of the six were repeaters. While all 18 performance peer groups generated double digit returns for the most recent 1-year period, only one generated double digit returns for two years two for 3 years, and 13 for five years. This suggests that immediately prior to the pandemic was a good time to invest in the average US Diversified Equity Fund. Accepting below average returns in the short term produced good results in the long term. This further suggests that picking the right year to sell an investment is more important than the right year to buy. However, as with almost every betting rule, the opposite can work. 

 

I believe you need to pay attention to the nature of the period when buying or selling. Investors in the US market should probably recognize that the average performance year is generally single digits, which should be evaluated relative to the performance of peers. Broader considerations should be left to double digit years, like now. Bet against the crowd if you intend to sell in a holding period shorter than five years.

 

Management Structure is Not Optimal 

The President’s cabinet is non-voting and is at best an advisory group. Large meeting tables of decision makers should be avoided, be they for political organizations, business, or non-profits (including educational and medical groups). The groups needing large meeting tables are not likely to produce dynamic results. President George Washington had a cabinet of 4 people, the secretaries of State, Treasury, and War, plus the Attorney General. Our present Cabinet has 26 members, 15 Department heads and 11 Cabinet level officers. 

 

Another Focus Should Be Updated 

 I don’t have the underlying data on our government leaders, but I suspect the majority have not spent operational and/or educational time in Asia or Africa. As a global investor I believe it is essential to correct this to effectively deal with the fundamental problems coming down the road. 

 

PS 

This week there have been a number of articles about the death of Daniel Kahneman, a Nobel prize winning psychiatrist and developer of behavioral investing. His basic premise was that investors are not rational and invest more for psychological reasons than sound investment reasons. This discussion may bring us back to rational decision making with your help.

 

Like most analysts and others commenting on investments, I have done the easy half of the job by supplying my thoughts on the buying function of investing. The much more difficult function is the disposal of investments, which is normal for the investment related committees of the two tech-oriented universities on which I serve. The reason for this one-sided effort is that making a buy decision is relatively easy.

 

By far the more difficult task is deciding to sell all or a part of an investment, which is a much more a personal decision and much more complex. The decision process should deal with some or all of the following topics:

  • Likely reaction when other critical investors find out.
  • Tax implications.
  • Impact of the decision on the rest of portfolio.
  • Dealing with beneficiaries.
  • Legal aspects.
  • Performance results.
  • A least 10 other factors

I intend to share my impressions over time, with the thought that my audience of bright, experienced people will share their reactions. The reason I mentioned the groups of bright people I am connected with is that I learn how they approach various investment problems and use this information to address issues we all need to manage.

 

Next week, most of the blog will be devoted to an article produced by a brilliant well-rounded Professor from the Stevens Institute of Technology. The article explores how government actions had an unintended inflationary impact.

 

I am very interested to hear your reactions to this experience.

 

     

 

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

Mike Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830

Mike Lipper's Blog: Fragments Prior to Fragmentation - Blog 829

Mike Lipper's Blog: Collateral Rewards, Risks, & Opportunities - Weekly Blog # 828

 

 

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.

Sunday, December 11, 2022

What does your 4.0 Profile Tell You? - Weekly Blog # 763

 



Mike Lipper’s Monday Morning Musings


What does your 4.0 Profile Tell You?

 

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

            

 

 

When one sees a mark of 4.0 it usually signifies academic perfection. As the investment game is different from other realities, so too are our measurements and goals. As much as we try, none of us has established a long-term investment record where each investment in each period produces a satisfactory performance record. We need a different type of measure to produce a learning device to improve performance.

 

These thoughts led to four inputs for investment action. After listing the four, it became clear that each label ends in an “o”. Recognition of these inputs might help sum up the importance we attach to each and explain what type of an investor we are and the performance we generate.

 

The four main inputs are:

  • Macro
  • Micro
  • Politico
  • Psycho

 

Macro is the generalized investment thinking of most people. As discussed in recent blogs, most pundits and their dedicated investors are in one of two camps. They either believe or don’t believe that investment gains are being held back by inflation, with changes in the level of interest rates the only way to cure the problem. The second group believes that current performance is due to broader structural problems and basic imbalances. Among these problems and imbalances are the lack of constructive leadership throughout society, including politics, education, the non-profit sector, and businesses.

 

As a life-long student of investment performance I suggest that it is extremely rare that the current generally accepted macro view will correctly predict the future.

 

Micro inputs can be translated into “God is in the details”. Some of these details are derived from audited statements where there are very few mathematical errors. (Other than measuring the wrong things in the wrong way.) As an investor I value incomplete observations of changing elements more. Such as changing of the number of workers doing different tasks, changing the number of customers making spending or selection decisions, or the number of customers consuming specific goods and services. My interest is not the raw numbers themselves, but their volatility and where they fall in the range of past actions. The key is to recognize changes in people’s behavior and try to guess their motivations.

 

Politico also consists of two parts, what is likely to happen and what one hopes will happen. The closer the two are, the less likely the result will occur. Interest at various levels may also influence perception, be it international, national, local, industry, organization, or family. As a practical matter, the interest of greatest impact will likely be the reverse of the order above.

 

Psycho deals with our optimism and pessimism, including the confidence in our personal ability and willingness to make meaningful change.

 

Applying Inputs

As with any composite of inputs, one can treat each equally or weight them appropriately. For example, I might weight macro 2, micro 4, politico 3, and psycho 1.

 

In this situation it would be difficult to select investments that didn’t have strong micro attributes. Politico would also be an important consideration. Both macro and psycho would only be important if micro and politico were not individually selected. Under these conditions I would be unlikely to act on macro influences but would probably make moves if micro or perhaps politico exerted strong directional inputs. In general, I would need more evidence to make major changes to my portfolio based on macro events. (A second level adjustment could be applied to the strength of my belief in each. For example, 90% for micro and 10% for psycho.)

 

There are many other selection processes. Some work better than others under different circumstances. The value of understanding one’s selection biases is to direct focus to what is important.

 

Clues of the Week

Each journey starts with a first step, as does each long-term investment record. Our problem is that we don’t know which week is the beginning week.  Additionally, no long-term record has each week moving in lockstep with the long-term record. That is why we search for clues each week. As with many investigations we look at many clues, some of which will be wrong. I summarize in these blogs the most likely.

 

In terms of forward motion there wasn’t much this week, but it is possible the ratios of new high/new lows, volumes, leading/lagging sectors, and news from beyond the stock markets could be instructive.

  1. On the NYSE, new lows were larger than new highs each day. (Only true for 3 days on the NASDAQ.)
  2. More shares were sold at declining prices than rising prices in 4 out of 5 days, with weekly volume -2.6% for the NYSE and -6.1% for the NASDAQ compared to the prior year.
  3. Of 32 S&P Indices, only the Asian Titans 50 rose for the week. The prior leaders, energy and financials, turned down, while healthcare and tech rose.
  4. Personal Savings were +2.3% vs +7.3% a year ago. Steel capacity usage was 73% vs 82% a year ago. A Jeep Cherokee factory to indefinitely lay-off workers in February.

 

Despite the “happy-talk” of inflation peaking and interest rate hikes slowing, investors and consumers are not buying a turnaround.

 

Incomplete Strategy Labels

Pundits and marketeers prefer short, snappy labels for various portfolio strategies. These are typically one-sided as they only describe the purchase side, not the other strategies excluded. Below are some examples of more instructive labels:

  • S&P 500 Index - Market-cap or equally weighted
  • “Go to Cash”- Freeze the rest of portfolio
  • All investors - Traders, investors, taxable or tax exempt (deferred)
  • High/low P/E without identifying the date - Price is current when earnings lag. (I prefer to use operating or net cash flow after debt payments.)
  • High/low volatility without identifying the period of volitivity -Intra-day, daily, weekly, monthly, yearly.

 

Readers may have their own examples of mis-labeling.

 

 

 

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

Mike Lipper's Blog: Week Divided: Believers vs Investors - Weekly Blog # 762

Mike Lipper's Blog: This Was The Week That Wasn’t - Weekly Blog # 761

Mike Lipper's Blog: Trends: Deflation, Stagflation, or Asian? - Weekly Blog # 760

 

 

 

 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 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

  

Sunday, December 27, 2020

Stud Poker, The New Swamp Game - Weekly Blog # 661

 



Mike Lipper’s Monday Morning Musings


Stud Poker, The New Swamp Game



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




The never-ending battle between Principles and Principals for the swing votes is entering a new phase that will impact investors. Since ancient Greece’s limited democracy, historians have described the battle between Principles and Principals for political control in capturing a relatively small number of swing votes. Most historians put us at a disadvantage in analyzing the conflict, as we do not have a useful understanding of what really happened. Most historians rely almost exclusively on after-the-fact comments from those supporting various uplifting Principles, because there are easily available texts joining the believers in the nice sounding principles. The other side, regardless of winning or losing most of the time, leave evidence of the tactical moves that led to their success. Very few people produce a contemporary tale of the emotions that drove them to their decisions. At best we have an incomplete outline of what they did. Human Principals are by nature executors and at best leave a history of their successful deeds.


“Where Are We Now?” 

Regardless of the final result of the two Georgia Senate races, we will be in an era of divided government. Beneath the surface we are likely to see deep splits within both parties, with different factions positioning for 2022 and 2024 elections. In addition, various members need to build or rebuild the “mother’s milk” of politics, contributions. Many need to be seen as advocates for various local interests, which may conflict with the views of the national parties. It is worth remembering that the last national elections were fought primarily over unattractive personalities rather than uplifting principles. (Remember, US voters often express their negative views by voting for the opposition.)


Elected vs. Unelected

The number of elected representatives in Washington are under 600. The number of decision makers in various government departments and agencies are clearly many multiples of the elected people. Additionally, there is the political crowd, including official lobbyists and so-called “think tanks” following questionable principals. For the most part they are permanent residents in what is known as “the swamp”. Not only will they outlast most politicians, they are experts at manipulating the dictates of elected government.


Despite the egocentric nature of those in the capital, outside forces occasionally impede the political will of the elected leaders. The pandemic is just one such influence. Also both technology and economics increasingly have an impact. But let us not forget what is probably the most powerful force impacting almost everything, demographics. 


“The Game”

To understand the game, look at the page count coming out of the so-called “Stimulus Package”. The Democratic Leadership put out a single page of what they believed were their accomplishments. The senate driven bill was in excess over 5500 pages, a clear example of a negotiation by Principals. 


The incoming administration looks to this legislation as an example of bipartisan cooperation. The President-elect’s history in the Senate was not based on initiating legislation but working on compromises. The main bargaining chip in the likely compromise with the Principals is often identified with the letter “C”, or a passing grade. Three of the C compromises, often delivered outside of specific legislation, are Contracts, Clauses, and Circuits and Federal departmental judgeships. Large government contracts with sweetheart provision clauses are often favorable in terms of taxes, tariffs, and regulations. They also regularly secure contributions and votes. Circuit or department judgeships are worthwhile endeavors to instill a “friend” in the court.


Stud Poker Model

Watching legislation go through Congress and the White House is similar to the progress of a single game of stud poker. Stud poker, a seven-card game among a handful of people, was popular among political types for many years. It starts with each participant receiving two cards face down and one face up, followed by a round of betting with some players dropping out. It is followed by three rounds of getting a face up card and additional rounds of betting and/or folding with each card. The seventh card is dealt face down, again followed by a round of betting. One can win by being the sole survivor if all others drop out due to seeing both the exposed open cards and their own cards. You can also win by evaluating the face down cards and interpreting the betting and actions of others. The skill in the game is first assessing one’s own likelihood of getting a good hand, by knowing your own cards compared to the possible hands of others and the impact of their betting. There are two ways to win, have better cards than others or convince them that you have better cards where they fail to match your betting. You buy the pot of all that was waged without turning over your face-down cards. Poker is simple compared to Washington politics, with known and unknown cards.


In seeking a legislative compromise it is important to identify the strength of conviction that a useful benefit can be secured in reasonable time and determine what has been promised to others. Often, the more experienced legislators or their top aides can create an advantage that more junior Congressional members are unable to. 


Let the games begin!!  


What to Do?

As with more questions, it depends on your goals, measurements, and tolerance for disappointment. The answers for most of these questions is very dependent upon the time-period and measurement applied. The shorter the time-period, the less influence of timing decisions. Based on past experience, there have been 25% declines in one year and 50% declines in a couple of years or more. It is the measurement method which causes the most trouble in my opinion. In choosing between a very limited number of alternatives it is easy to measure absolutely, although with a large number relative performance is often more realistic. Most measure by comparing against a mathematical average, which is heavily influenced by the extreme performers. The more mathematically oriented may use the middle result or median in an array, which is preferable to me. With a large universe of competent players I prefer to subdivide performance into quintiles, avoiding the knife edge of quartiles.


I tend to view the performance within any quintile and particularly the third quintile as almost random, with a small number of extreme results being difficult to repeat. When managing in a competitive league that encourages shifting managers frequently, data from the current best performers is often used, not by me. For accounts having stringent absolute payments requirements, I prefer to measure against absolute and relative capital preservation. 


Now?

I prefer to work with long-term investment horizon accounts, where demographics, discipline, savings habits, intellectual-honesty and productivity of the labor force tend to structure my working framework. I don’t make any strategic changes, as some tactical changes will be required due to fundamental changes within the specific investments themselves.


As distinct from the long-term accounts, those that have effectively fixed or semi-fixed payment requirements need to balance the risk of reduced actual or anticipated payments with the generation of future sources of income production. Depending on the specifics of the account and our perspective, the mix between the two motivations is within a 30-70% mix. (This is not an essential prescription to the standard balanced fund’s stock/bond ratio, because both bonds and stocks may have capital risk and appreciation opportunities.)


As we enter the new year, the first of a radically different administration and a shifting power base, investing for the short-term in a competitive environment is going to be difficult. At times investments are priced cheaply in terms of their fundamentals, whereas at other times markets price securities near their probable top. In the last week of 2020 I don’t know whether we are closer to one extreme than the other.


As often the case when I am faced with a decision, I attempt to follow a sales prescription from Ben Franklin’s commercial activities and make a list of positives and negatives. Some salespeople convert these lists into a form of a balanced sheet, which surprisingly almost always has more positives than negatives. Before producing my lists I should identify my anti-momentum bias. Much like at the racetrack, I don’t have to bet on every race or market condition and the bulk of the money I am responsible for is long-term. (Think beyond this decade.)


The US stock market has fluctuated in a relatively narrow trading range this autumn/early winter period. Only after a material market move will we be able to determine if this was the distribution of risk from smart investors to less smart, or an opportunity for smart investors who perceive the near-term future as being materially better than what we have seen in the last four years. Thus, one can say that the current market brings together sceptics and believers. 


As the volume of transactions compared to the number of shares outstanding is low, one can see that there is not an overwhelming consensus view by market participants. Most of the money is invested for the long-term, at least beyond the incoming administration’s period in office. In the last two weeks of 2020, sceptics are selling to protect their capital gains from possible changes in tax rates on income and estates. s Buyers perceive an expanding domestic economy and a less turbulent world.


Positives (Random order)

  1. The crowd at The Mall at Short Hills appeared to be larger on the first shopping day after Christmas than the days before the holiday. We guess the crowd had to line up and be temperature tested before entering big brand clothing and jewelry shops. The longest lines were at the Apple (*) store. Restaurants were busy and had lines, indicating that shoppers were committed to spending hours shopping.
  2. I believe we are in a somewhat new investment era because of COVID-19 and global technology’s impact on consumption, suggesting our favorite numbers are out of date or out of scale. Key relationships between risk and reward probably remain reasonably constant, but not their number identifiers like P/E, yields, stock/bond ratios, turnover rates etc.
  3. Shortages permit big price increases e.g., intra-Asia shipping container prices being up 450%. On a broader base JOC-ECRI Industrial Price Index is up 23.87% year over year. 
  4. Long overdue stock leadership rotation in favor of small and midcap stocks will bring more capital into a needed sector. Tech focused stocks have returned temporarily to leadership.

(*) Personal position


Negatives

  1. 62% of this week’s WSJ roster of prices declined.
  2. A consumer confidence survey, expecting a +97% reading, came in at 88.6%.
  3. Some strategists see meaningful risk in the Middle East and China. In the former case, strained budgets will force risky expansions. In China’s case, a further crackdown on debt creation is expected.
  4. The Biden administration relying on people for material economic expansion based on their Obama Presidency experience.


Subscribers, please remember the two iron clad rules of investing:

  1. The only guaranteed product of the market is to create humility.
  2. Surprises happen because most don’t expect them.  




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

https://mikelipper.blogspot.com/2020/12/mike-lippers-monday-morning-musings.html


https://mikelipper.blogspot.com/2020/12/searching-for-surprises-weekly-blog-659.html


https://mikelipper.blogspot.com/2020/12/an-investment-dilemma-with-possible.html




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 - 2020


A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.