SPORTS FANS SELECT CABINET & OTHER PROBLEMS - Weekly Blog # 864

 

 

 

Mike Lipper’s Monday Morning Musings

 

SPORTS FANS SELECT CABINET

&

OTHER PROBLEMS

 

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

 

 

 

Go to the Arenas

As we view many contests and competitions, it is clear to us the mistakes combatants are making. Apparently, the President elect is choosing his cabinet based on the following three characteristics:  

• Personal loyalty to Trump.
• Complaints about what the government does or does not do.
• No experience in running a large federal organization.

 

I remember from my sports days, both in secondary school and university competitions, various screams were heard about the details of the front-line games or the details of a move setting up some subsequent play. All we knew was that most of the players were inexperienced in their announced positions. They may have been fortunate in that many relied on what they were taught in school in those days. For example, they could have taught us that stock prices could approximate the value of a stock, or a sound reaction to an event.

 

Today, 80% of the volume of the S&P 500 is passive and 10 stocks make up 39% of its market-cap. One stock is bigger than every other national stock exchange, except Japan.

 

Bonds Speak Differently

High grade US Treasuries bond yields have risen 124 basis points in a year, sending their prices down. However, the prices of medium-grade bonds have been flat over the same period. This does not speak to the quality of US Treasuries but instead reflects the demand for them. Time value (the bond’s maturity) used to be a critical element of the bond market. Today, only 31 basis points of yield separates the 2-year bond from the 30-year bond. (This may suggest that due to low yields, very few of the current owners of 30-year bonds are expected to own them for a long time.)

 

Caution: Keep Data and Date Tied

The Saturday weekly Wall Street Journal roster of stock indexes, currencies, commodities, and ETFs showed gains for 74% of them. The American Association of Individual Investors (AAII) showed an increase in bearish readings, reducing the spread between bulls and bears to 8%, from 21.5% the prior week. This is a dramatic change. It could reflect a shift in the sample survey makeup. Alternatively, because the AAII survey was taken early in the week it reflected the views of the prior week. Overall, this week’s data was positive every day, suggesting “Black Friday” sales enticed customers for at least two weeks. That is my preferred guess.

 

What do you think?    

 

Happy Thanksgiving, particularly those and their families serving far from home.

 

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Mike Lipper's Blog: Reading the Future from History - Weekly Blog # 863

Mike Lipper's Blog: Inflection Point: “Trump Trade” at Risk - Weekly Blog # 862

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

 

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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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What Did Friday’s Market & Political Actions Mean for Investments? - Weekly Blog # 687

 

Mike Lipper’s Monday Morning Musings

What Did Friday’s Market & Political Actions Mean for Investments?

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

(One of the challenges of living in the present is evaluating what has just happened, related to both history and expected futures. The following blog briefly examines four alternative sets of actions related to Friday’s events.)

Friday’s Actions

• Compared to a relatively low volume period for last two months, the New York Stock Exchange volume shot up 7.6 million shares from Thursday’s 3.9 million. Somewhat higher volume was generated on the NASDAQ, 7.8 vs 4.3 million shares. Interestingly, the Barron’s Confidence Index, which uses bond yields, shot up meaningfully in favor of high-quality bonds vs. intermediate bonds. For those who believe bonds often move before stocks, an increase in interest for high quality bonds is negative for future stock performance.
• The impetus for sharply rising stock prices in the morning was the announcement of a bill on infrastructure extensively negotiated by 21 Senators. The Senators were joined on the White House driveway by President Biden, who agreed without reservation to the proposed bill.
• Within two hours there was an announcement (from the 3rd term Obama staff) that the President would only sign the infrastructure bill after reconciliation actions coincident with the passing of his social programs. 
• This brought an immediate reaction by a number of Republican Senators who were part of the 21 member negotiations group. There were additional rumblings from a few Democratic Senators. Not surprising, price gains of Friday morning shrank.
• After the market close the White House issued the following statement from The President, “My comments also created the impression that I was issuing a veto threat on the very plan I had agreed to, which was certainly not my intent.”

What Should Investors Ponder?

1. Who is running The Executive Branch? Is it the President? Or is it the third-term Obama staff with their second-term FDR model?
2. Is redistribution of political contributions inevitable?
3. Pundits and their followers pay too much attention to political news.
4. Short-term market fluctuations do not determine long-term wealth opportunities.

Each Investment Portfolio Should be Managed to Fulfill it’s Needs

With that thought in mind the following tactical considerations should be considered.

1. We live in a global world. Increasingly, many of the goods and services believed to be vital are influenced by both attempts to restructure the domestic economy and actions taking place beyond our borders . Historically, people of wealth have diversified by investing outside the purview of their home governments. For the most part Americans have been a bit late in this effort. Our first conscious international exposure was often through buying shares in US-traded multi-national companies. In many ways this is a “half-pregnant” move. We are a believer that all investors should have some exposure to markets priced in currencies other than the US dollar. The needs of politicians are different than those of investors. Thus, the actions of selected foreign governments may be more favorable to investors than the those in the US and some of its states. This may be a particularly wise time to add individual foreign stocks and mutual funds investing internationally.
2. For shorter-term portfolios, considering the political uncertainty we are experiencing it may be wise to adapt trading technics, distinct from buy and hold investing approaches.
3. While the financial headlines are very short-term oriented, this may be the time to invest using fundamental terms. Dollar cost averaging could make a lot of sense.
4. For those able to meet liquidity needs with a portion of their portfolio, investing in selected private investments could make sense during a period likely to see increased investment regulation.

Please share your views on what has been expressed.

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

https://mikelipper.blogspot.com/2021/06/mike-lippers-monday-morning-musings-50.html

https://mikelipper.blogspot.com/2021/06/to-benefit-long-term-investors-invert.html

https://mikelipper.blogspot.com/2021/06/history-good-lessons-not-great.html

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A. Michael Lipper, CFA

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The Art of Portfolio Construction - Weekly Blog # 615

Mike Lipper’s Monday Morning Musings

The Art of Portfolio Construction 

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

This week had attention getting headlines that might be important to prudent investors.

1. The Barron’s Confidence Index dropped by an unusually large 2 points as high quality bond yields rose less than intermediate credit yields.
2. The 30-year yield to 3-month yield spread narrowed. 
3. The Baltic Dry Cargo Index was down 30% from a year ago (negative for world trade). 
4. SoftBank failed to raise the capital anticipated.

Despite all the news that has made headlines this week, we professional managers and serious investors must continue to manage the portfolios entrusted to us. Many professional journals are full of articles about Artificial Intelligence (AI), suggesting the management of investment portfolios can be done entirely “by the numbers”. Contrary to that view, I believe that portfolio management is an artform, similar to life in general.

That is not to say that math and related science has no place in portfolio management. The great artists of the world, either consciously or not, use mathematical principles in producing their art. It is the same with portfolio managers. Just as a painter looking at a blank canvas needs to contemplate the organization of the space, selecting the right colors to convey his/her point of view, so too do portfolio managers, particularly the successful ones.

One of the first choices the portfolio manager must make is whether to utilize many choices or just a few. Some portfolio “artists” will fill the space with many details, while others only use a few, concentrating on a limited number of opportunities. As someone studying investment portfolios for most of my life, I have come to some working observations.

1. The need to quickly convert some of the portfolio assets into cash in order to meet responsibilities focuses attention on liquidity. In markets of limited liquidity and occasional sharp price moves, owning a large number of securities often suggests the portfolio has a good amount of liquidity. This is not always true, but many portfolios do not need a great deal of liquidity.
2. The next consideration for portfolio strategists is career risk, as portfolio managers are rarely employed under long-term contracts. This is particularly true in the mutual fund industry, my preferred research laboratory. Termination is often triggered in one of two performance directions, up or down, depending on which is the greater fear. By definition, there are a limited number of individual securities that will be up significantly in any given period. If that is your goal, the best portfolio structure is to own only the big winners. On the other hand, career risks could be triggered by falling more than peers or the market and/or exhibiting an unnerving level of volatility. In that case, portfolios might include a large number of individual issues in order to generate returns similar to peers or market indices.

As a manager of portfolios of mutual funds, we utilize both extremes in some combination to meet the expressed or perceived needs of the account. Where possible, we want to use concentrated portfolios to give us better than average performance, accepting some additional downside risk. We offset these concentrated funds with a selection of portfolios that have numerous securities. They often look similar to market indices or are actual index funds.

I have great empathy for the managers of concentrated portfolios, as I for many years have managed a private concentrated portfolio investing in global financial services stocks and funds. I am not soliciting new members, nor am I recommending the purchase of any of the financial securities I will mention shortly. I am using a brief discussion of my experience to highlight some of the attributes of one particular concentrated portfolio, which might apply to other concentrated portfolios. The following are elements that may be found in concentrated portfolios:

1. During a recent period of positive performance for the portfolio and negative results for the benchmark/peers, only 7 of the 19 positions rose. The portfolio outperformed in part due to the two largest positions being the two best performing stocks and totaling 25% of the portfolio. The use of weighting is an important tool.
2. More important than what we own, might be what we don’t own, life insurance and large commercial banks.
3. Financial services can be used effectively beyond brokerage commissions and deposits to address other needs or fears. For example:  
1. Using ADP and Berkshire Hathaway to participate in GDP growth
2. Using Franklin Resources and Invesco to hedge the value of the US dollar.
3. Using NASDAQ for a general level of speculation.
4. Using Allegheny Corp. and Berkshire to participate in rising casualty insurance premiums.
5. Using the London Stock Exchange through Thomson Reuters to participate in the evolution of global stock exchanges.
6. Some of these options could also be considered hedges in a financial services portfolio.

Conclusion: Concentrated portfolios can work both offensively or defensively when appropriately structured, but need to have better security selection than portfolios with a larger number of issues.



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2020/02/significant-turnaround-two-fearful.html

https://mikelipper.blogspot.com/2020/01/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/01/is-it-always-brains-over-flexible.html



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A. Michael Lipper, CFA

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Managing Opportunity Costs

Introduction

All who at least tangentially follow the stock market know that at some time in the future stock prices will experience a major decline. I know I am premature, but as a securities analyst, portfolio manager, investor and entrepreneur I need time to position my mind and my emotions.  I want to be prepared intellectually and emotionally to survive the decline and participate in the eventual subsequent rise.

As I have previously written, I believe sentiment or if you prefer the standard phrase, rising animal instincts, have become the driving force for stock prices rather than the various statistical ratios which as professional investors we are comfortable. The two present indicators I follow that demonstrate rising sentiment are, (1) the supposedly retail flows into Exchange Traded Funds (ETFs) and (2) the relative movement of bond yields.

Just at the time that preordained lists of stocks are showing less cohesiveness or if you prefer correlation, media are reporting a significant increase in the use of ETFs by the retail public. Stock prices within various groups are moving differently, thus individual security selection has become more needed for investment success. In the broad market indices the financial and utility sectors are moving not only at different speeds but in some different directions. Within the sectors there is considerable difference in individual stock price moves. For example, within the banking sector until quite recently the prices of many smaller banks have been much stronger than those of the mega banks. The price/earnings ratios on many of the smaller banks is considerably higher than those of their larger peers.

The yields on a list of intermediate credits tracked by Barron's has been flat thus far this year, 4.54% in the first week of the year and 4.57% last week shows relatively stable while there is less demand for a similar list of the highest quality bonds with their yields rising from 3.46% to 3.62% last week. The professionals in the bond market tend to be much quicker than equity people to changes in credit conditions.

	First Week of 2017	Last Week
Intermediate Credit	4.54%	4.57%
Highest-Quality	3.46%	3.62%

Source: Barron's

Preparing Mentally and Emotionally 

As is often the case, we are our own worst enemies. When stock prices decline we tend to measure the fall either from peak prices or purchase prices. Neither is particularly useful in assisting future investment activities. Both peak prices and purchase prices are historical accidents and don't have any forecasting value.

We should go back to our base case whether we are serving institutional or individual investors. Our goal should be to arrange payments that will cause people to react positively to the intended use of the money. With that in mind, investment success is an intermediate step toward our goal of delivering the needed funding. Whether we succeed or not is the opportunity cost that we pay to have the opportunity to achieve our goals. One can look at high opportunity costs (losses, fees, taxes, and efforts including emotions) as premiums to get the chances of better results.

At the racetrack the objective is to walk away with more money than when we entered. Not only do we count our losing bets against our winners, but we should also include our expenditures. In both the racetrack and investment experience we should add in the time and expenses of our analysis, perhaps deducting something from the continuing value of our analysis. If one bets on favorites with low odds and expected higher probability, that is a grinding-out game. On the other hand if one chooses less popular and higher paying prices, if successful, typically the win/loss ratio will be worse than those of the favorite player. However, at the end of the day one can walk away with more money. For some, the second player (regardless of monetary result) could have more thrills than the winner of expected results. To many these thrills are in and of themselves a gain on the day unlike those experienced by the player who is with the crowd. In many ways the opportunity to achieve these thrills is an opportunity cost worth enduring.

Our problem as professional portfolio managers is to mix both extremes in a specific portfolio for a client's needs to make future payments. We believe that first recognizing the various timespans for future payment aids in identifying the levels of current and future risks which are appropriate for the accounts. Within each of the timespans one can employ the appropriate balance of lower risk and higher risk funds and securities. 

At the end of the day we get our thrills by meeting the payment goals of the account through a satisfactory level of investment success.

Post Script

Ruth and I hope that our readers in the Northeast US find themselves safe and warm during this coming week’s inclement weather.

 

__________

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A. Michael Lipper, C.F.A.,
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