Dead Cat Bounce > Last Chance - Weekly Blog # 952

 

 

 

Mike Lipper’s Monday Morning Musings

 

 Dead Cat Bounce > Last Chance

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

 

          

 

We appear to be in a normal trendless summer, with relatively low volume on hints of fall upsurges and declines. This poses a big risk for

investors with large gains in their portfolios who could be subjected to major moves from stampeding investors selling for fear of a big decline or speculative surge.

 

I am therefore suggesting that this is the time to build cash reserves so that you are in a position to take advantage of large future declines. The trick is to have a reserve large enough to shelter the portfolio from meaningful losses, but small enough to protect against being out of the game following the next rise. The next decline could be major and last for a long time, which might encourage those who have too much cash to stay out of the game. That is the real risk facing careful investors.

 

My suggestion is to treat your account as a long-term pension or endowment account with annual flows of about 10%. This would require a two-year buildup of short-term cash reserves under normal investing conditions. This suggests a target equity commitment of 70%, with a short-term reserve of 20% and an emergency reserve of 10%. The key to this strategy is avoiding a down market that reduces the equity commitment below 50%. One way to accomplished this is to begin an orderly reinvestment program in the declining market.

 

Reasons for Concern this Week

• The Consumer Confidence survey fell to 50.8% vs the expected 52.4%.
• Estimated GDP for the second quarter came in at +1.5%, below the estimate of +1.8%.
• Chinese tech stocks fell -8.6% in July. On Friday, Apple (personally owned) fell -7.4% on rising earnings.
• Barron's 10-year high grade bond yields slipped -0.03% while yields on 10-year mid-quality bonds rose +0.04%. (The bond market is more concerned about the future of the US Government and the currency than commercial credits.)
• There were 286 new highs and 189 new lows on the NYSE, versus 468 new highs and 692 new lows on the NASDAQ*. Suggesting there is presently more opportunity in industrial and financial stocks on the "Big Board" than tech-driven stocks on the NASDAQ. (*NASDAQ stock owned in managed accounts and personal portfolios)
• Warren Buffett is quoted as thinking the market is gambling, not investing. (In the past his general warnings have proven accurate.)

 

What Do You Think?

 

 

 

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Mike Lipper's Blog: Long-Term Money Via Telescope, Not Microscope - Weekly Blog # 951

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Mike Lipper's Blog: Little Occurred During the Trading Week - Weekly Blog # 949

 

 

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Data May Be Signaling Change - Weekly Blog # 922

 

 

 

Mike Lipper’s Monday Morning Musings

 

Data May Be Signaling Change

 

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

 

 

 

Preface

I came to my desk Saturday morning and was prepared to begin writing this week’s blog. My thought pattern suggested we were quite possibly in a pivot period, with market leadership shifting to foreign priced securities priced substantially below “AI” securities. Then I paid attention to Bloomberg television, which is on 24 hours a day. I was mesmerized by the news on the raid on Caracas, the capital of Venezuela. The daring and skills involved were impressive and the growing implications are disturbing.

 

Normally, I try to view everything from a global perspective, as I believe almost all we do has roots in the global world. However, for this week’s blog I am not going to deal with the longer-term implications of the successful raid and capture of indicted criminals. It is too early to tell. I expect these events will create global shadows which I will address in future blogs. The world listens but does not necessarily follow the U.S

 

Pivoting to the Data

 

Last Two Weeks of 2025

Each of the last two trading weeks, including January 2nd, have had only four trading days of relatively light trading volume. A disproportionate number of trades were either tax motivated, or position statement driven. Nevertheless, they share traits with many earlier days of December’s trading, with more stocks sold on minus ticks than rising prices. It is worth noting that the popular stock market indices generally rose a small amount. This highlights the dichotomy in the market between what many believe are retail driven indices and a broader, slower-moving institutional market. I am guessing many retirement and other long-term institutions were relatively quiet in the last part of 2025.

 

This institutional hesitation mirrors the large corporations’ labor practices, where many companies spend considerable amounts training new employees, which they consider assets. They are therefore reluctant to fire many employees and are slow to hire new workers. Some believe in the “promise of “AI”, where in the not-too-distant future companies will need less employees to produce the same or more sales. Consequently, many employers are not hiring new employees, other than critical replacements.

 

Typically, corporations begin investing new capital into their retirement plans in January, be it pension or 401-k accounts. The institutional advisory community has counted on this flow in the past. My guess, it may be smaller this year. We will see.  

 

Prices and Inflation

There were two lessons on prices in the Weekend Edition of The Wall Street Journal, which measures 72 traded items each week. Only 24 prices or one-third were up, and 48 prices were down. Are we peaking? The second lesson from these data is that markets deal with both extreme momentary shortages and slower moving prices, which are more common. One analytical technique I use to differentiate them is to examine the top and bottom two prices. On the upside is Comex Silver +142.34% and Platinum +127.57%. On the downside are Orange Juice -58.75% and Cocoa -48.05%. I believe these four are special imbalances, as the third extreme prices are the KOSPI composite +75.63% and the Argentine Peso -28.96%. The gaps between the extremes and third ranking are large. Much smaller but concerning nevertheless is the one-week industrial prices gain of +1.28% in the ECRI weekly index, suggesting inflation is not under control.

 

The Key Link

If there were a single suggestion of a world view of the US economy, it would be the value of the US dollar. The Financial Times headline “Dollar Is Wild Card in 2026”. This UK publication, now owned by the Japanese newspaper/wire service giant, is a traditional critic of the US. The value of the dollar is dependent on two factors, the value of the other major currencies and the price of the dollar. In 2025, numerous foreign markets have for the first time in many years appreciated more than the US. Currencies, like securities, are priced at their perceived future value. Not only is the US government spending more than it is earning through taxes and tariffs, but it’s also expected by many to continue to do so in the future. (Even if tariffs bring in a lot of money, part of the receipts are expected to be paid to citizens instead of being used to pay our debts.) In addition, both President Trump and Chairman Yi have stated they would both like their currencies to decline. Some weakness in the dollar may have been caused by individual and institutional investors selling dollars to buy foreign securities.

 

What to Do?

Examine whether it is prudent to have 100% of your long-term investment money in securities that are traded primarily in dollars? Is it time to pivot?

 

Share your thoughts, please.

 

 

 

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Mike Lipper's Blog: Investment Time Horizon Should Pick How You Measure the Results - Weekly Blog # 921

Mike Lipper's Blog: Tis the Season of Joy & Reflection - Weekly Blog # 920

Mike Lipper's Blog: Are Investors Seeing a Change? Politicos Are Not - Weekly Blog # 919

 

 

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Prepare to be Bullish, Long-Term - Weekly Blog # 804

 

 Mike Lipper’s Monday Morning Musings

Prepare to be Bullish, Long-Term

 

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

 

 

  

(N.B. in classical documents was a Latin warning for the reader to be prepared for elements of disbelief. Subscribers are likely to disagree with some or all points made. Nevertheless, they should be digested, even though they might question your firmly held beliefs. Some of these thoughts might even reinforce your own beliefs. In medieval courts there was often a paid clown or “fool” who might cleverly utter some thoughts that no one else would dare say. Perhaps, this is the role of this blog.)

 

Focus on the Finish Line

Almost all commentary about the market, economy, and individual prices without attempting to identify the end period outcome is lacking. One lesson from the racetrack was the order of finish from a particular race. The payoff parade was the actual running of the race, not any of guessing, analysis, or handicapping bettors did before the race.

As both an investor and a registered advisor, I attempt to make a guess at either the actual or relative return after an extended period. The minimum time period I am comfortable using to make an investment decision is five years. One reason I pick five years is a lesson learned at the track about the element of surprise, or “racing luck”, in any given race. In longer races there is greater opportunity to recover from a surprise than in shorter races. The second reason to focus on a five-year period was highlighted by the communist party. (I suspect they copied various business plans in the 19th century by instituting a 5 year political term.)  Many CEOs also negotiate a five-year term with their board of directors for incentive compensation. 

 

2028!?

Most money in the securities market is invested to meet retirement obligations or long-term capital expenditure needs. Those responsible for attempting to meet these needs should be judged by their performance over longer periods.

 

While you can never clearly identify the type of period we are presently in, I think it is the responsibility of the investor to make his/her best guess, as the type of market will probably impact the results.

 

2022 Change

While no single event is likely to change the direction of society or the economy, there is often a headline occurrence which can serve as a useful label. The single change that became a turning point for me was the COVID Pandemic. The Black Plague occurred centuries ago, and there were serious pandemics in the Spanish Flu in the1920s. However, for the most part pandemics in the modern era have been rare.

 

The reaction by the US government, led by the teachers’ union, materially changed the progress of society. Focusing exclusively on the securities markets, 2022 was a down year, due to curtailment of work and formal education. Governments rarely let a crisis go to waste and by 2023 government expenditures and curtailment of selected industries had enhanced inflation. Appropriate parallels were made with FDR’s elongation of a recession into a depression. 

 

First 9 Months of 2023

Perhaps it is ironic that little New Zealand’s central bank was the first to call for a 2% inflation goal and have its current indices generate a minus in front of them. The US may not be far behind, with Real Estate -5.4%, Consumer Staples -4.76%, Healthcare -4.09%, and most concerning, the S&P 500 equal weighted up only +1.79 %.

 

Where’s the Upside?

Almost all life is cyclical, with the largest gains resulting after major declines. The longer the current period of stagflation, the longer the hidden actions of building future earnings power will be at work.

 

On a longer-term basis, continued federal government deficits are a symptom of important twin deficits. Capable management throughout society, and the inability of the educational system to produce students suitable for current jobs. From pre-K to PhD, schools are producing unmotivated students who are ignorant of the world and irresponsible, primarily due to the views of their instructors.

 

Parents and employers are slowly exerting pressures for change, while businesses are evolving to meet the current needs of their customers. A non-recommended example is ADP, a company in our private financial services fund. The company started 74 years ago as a payroll service business. Today, with over one million clients, they have evolved into a Human Capital Management business providing a much larger contribution to their clients. 

 

The Public Accounting Oversight Board has stated that they are finding an alarming number of errors in audits. We are finding the same trend in providing many services to clients, which presents an opportunity. One other opportunity might be the mismatching of expected industrial demand for “modern” cars, data centers, and equipment to change the climate. To support these efforts there is a need for large quantities of high-grade steel production and there are no provisions to expend production.

 

Savings, possibly the biggest contributor to the value of stock prices in 2028 will be in the hands of a new generation of political leaders and managements of profits and non-profits. Hopefully they will make better decisions than in the recent past.

 

Please share with me your thoughts.

 

 

 

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

Mike Lipper's Blog: Selling: Art & Risks, Current & Later - Weekly Blog # 803

Mike Lipper's Blog: Investment Thinking During a Lull - Weekly Blog # 802

Mike Lipper's Blog: Need For a Correction Decline - Weekly Blog # 801

 

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.