This Was The Week That Wasn’t - Weekly Blog # 761

 

Mike Lipper’s Monday Morning Musings

This Was The Week That Wasn’t

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

            

 

 

In the earlier days of popular US television there was a program of satirical commentary. It was an American version of a British program with the same name, abbreviated TWTWTW.

 

Looking for leads related to writing my weekly blog I studied the four-day Thanksgiving week and concluded there really wasn’t much there. Evidently, much of the normal global trading around “turkey day” saw volume at about half its normal level.

 

Nevertheless, there were some snippets which may point to significant trends in the coming weeks. I found the following briefs of possible value in thinking about future periods:

1. The dollar index has dropped to 105 from 115 recently.
2. Taxable bond fund inflows were the largest since the week of January 8^th, 1982.
3. The 2-year treasury yield remained stable at 4.48%, while 10 and 30-year rates were 3.70% and 3.75%, respectively.
4. S&P warned that the corporate default rate could double if inflation remains high.
5. Goldman’s strategist believes the bear market would last into ’23.
6. B of A predicts 2023 gains of 25% for copper, 15-20% for gold, 12-13% for US investment grade bonds, 7-8% for US Treasuries, and 5-6% for oil.
7. My son Steve commented for Royce Partners that small-caps on average gain 12% and 16 % in even numbered years during the November-April period. (These are Presidential and Mid-term years)
8. Howard Marks reminded us of the inevitably of change. He also commented that the private equity and venture capital markets are too crowded. (Remember the losing percentage of favorites at the racetrack.)
9. China Region US registered mutual funds were the worst performers in the shortened week. (Over the weekend there were riots in the industrial and financial capital of Shanghai and elsewhere. These riots were the response to hardships caused by lockdowns to prevent COVID-19 spreading. (Apparently the Chinese vaccine is not as powerful those produced in US and Europe.)

 

Many will view this list as bearish but recognize that pundits and at least half the politicians are bullish. They believe we have seen a stock market bottom and are discounting a rising economy. It is possible they may be correct.

 

To those who have studied economic and market history it would be ironic if they were right, as it would be just a matter of time before a major recession/depression occurs. Societies often need these dislocations to initiate the kind of structural change necessary to correct for deep imbalances.

 

Please share your thoughts with me.

 

 

 

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

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

Mike Lipper's Blog: An Informative Week with Many Questions - Weekly Blog # 759

Mike Lipper's Blog: Are You Getting Value from Numbers? - Weekly Blog # 758

 

 

 

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A. Michael Lipper, CFA

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Picking Winners

The job of a professional investor is simply to pick winners, or is it? Professional investors focus on avoiding  losses (nominal or “real” )
and not appearing to act imprudently.

As regular readers of these posts already know, my two great learning schools were the race track and the US Marine Corps. The first taught me how to analyze and the second how to act. Allow me to share some of what I learned from going to "the track" in my quest to pick investment winners for clients and my family.

What is winning?

My betting objective for each day at the track and each season of visits was to finish with more money than when I started. As a wager of limited means I had to overcome my costs incurred including transportation, food, admission and the portion of winning tickets that went to the track and state/local taxes. For me these amounts could easily add up to a hurdle rate of 25%. Thus when it came to investing in the stock market or through mutual funds the costs seemed like a bargain particularly at long-term capital gains rates. With my objective of producing the first dollar of net profit after paying all incurred expenses dragging on my returns, certain basic strategies evolved:

          1.      Avoid losing by selecting only a limited number of races. (No multi bets or the equivalent of indexing).

          2.      Arbitrage the difference in potential payoffs between the winning payoff on a highly favorite horse versus half of the net pool for second place, if one of the first two horses is highly favorite.  At times such a bet may lead to a better return with some less risk than on betting on a favorite to win.

          3.      Look at current race conditions compared with the past record of the racers. Most often the odds on the horses that recently did well were less than those of horses whose immediate past results were poor. (For investors this is the difference between momentum investing or extrapolating vs. searching for new opportunities amidst almost always changing conditions.)

Applying winning strategies

Most fund selectors follow a disciplined approach to avoid losers;  they seek to avoid having any performers in the bottom performance quintile. If their remaining choices are averaged, they should have a performance record that is better than the average of the overall universe which is the equivalent of earning the first (small) dollar of profit.

The investment manager of a portfolio of funds, like me, constructs a mix of funds that in many, if not most markets should produce a satisfactory result. The way to do this is to diversify into a group of funds which will by direction and magnitude offset periodic losers with winners. The selection process should be guided by the assessing the chances of success over the chances of permanent loss of capital.

In contrast, the individual security analyst is most oriented toward the future, looking for the odds of meaningful changes that are not appropriately recognized in current prices.

The current picture

Market price correlations are widening; the price performance between the best performer and the worst are no longer parallel. This phenomenon could make the use of ETFs less useful. A number of actively managed portfolios are demonstrating that their selectivity is what produced better than average performance in the first quarter. In many cases the weighting of individual issues combined with good selectivity produced meaningful performance increments.

Dividend paying stocks have been leaders for over a year. But the focus is narrowing away from just yield production. JP Morgan is recommending common stocks of companies with high free cashflow production as companies that could increase their dividends among other uses of their cash generation. A number of mutual funds have either publicly espoused or just followed a strategy of selecting stocks of companies with rising dividends. The focus on dividends is part of what appears to be an almost insatiable drive for income to replace the former sources of reasonable interest on government bonds or bank savings accounts. This drive has caused an enormous flow of money into corporate bond funds. But this is beginning to show early signs of change. In 2010 the average trading turnover (the amount of trading vs. the amount of outstanding bonds) of investment grade bonds was 95% and now has dropped to 75%. This may indicate that the objective of trading to add to yield is declining a bit.

Searching

We have done a good job for our accounts, but at this point in the cycle I am worried that on a relative basis my accounts could use more future growth-oriented funds as well as highly selective fixed-income funds. If you have any suggestions in terms of techniques, or perhaps a securities analyst-trained person who should join us, please let me know.

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Copyright © 2008 - 2013 A. Michael Lipper, C.F.A.,

All Rights Reserved.

Contact author for limited redistribution permission.