Two Cycles Are Worth Watching - Weekly Blog # 793

 

Mike Lipper’s Monday Morning Musings

Two Cycles Are Worth Watching

 

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

 

 

 

Concept

I am basically a student. My reading of history, politics, government, finance, and sports, reveals that each trend reverses somewhat before following a different trend.

 

In selecting individual securities, the specific characteristics are often of primary importance. In constructing a managed portfolio, the analysis of sectors are important. In deciding whether or not to invest, cycles may be the most important factor. All of these considerations need to be adjusted for the identified needs of the owner of the asset. As an investment adviser I must consider these different responsibilities.

 

Below is a review of history through different cycles, along with a view of both the current period and various potential phases.

 

First Investment Cycle

In some respect an investment advisor is like a baseball umpire behind home plate calling balls and strikes. A famous umpire once stated that he calls them as he sees them. As an umpire I call them the same way. The difference is that my initial view utilizes mutual fund data. Not necessarily the best investment research media for all accounts in all situations, but a superior one for relatively unbiased analysis. Other measures rely either on a small group of expert analysts, media employees, or choosing to be listed in a specific marketplace.

 

Unlike the alternatives, mutual funds have in or out cash flows every market day and reflect the periodic decisions of their managers. Since there are more than 15,000 funds, this represents a large number of decision makers. Their results are much quicker at picking up the impact of investor decisions. (My old firm’s data is now published by the London Stock Exchange Group, which purchased it from a subsidiary of Thompson Reuters after it acquired it from me.)

 

Each week I review 107 mutual fund peer-groups over 11 time periods. This week I focused on the total investment return in three time periods: the 5 and 10 years periods and the period since the trough on 3/23/2020 through 7/13/2023 shown below:

 

Peer Group     5-Year    10-Year    Since Trough

Large-Caps    +10.20%    +11.26%      +23.62%

Mid-Caps       +7.42%     +8.99%      +25.74%

Small-Caps     +5.62%     +8.00%      +27.25%

Value          +7.26%     +8.01%      +24.63% 

Growth         +8.37%    +10.06%      +20.23%

 

Observations:

1. Large-Caps won the last 5 years, but not the recovery.
2. Small-Caps were the recovery winner.
3. Mid-Caps with value orientation could be a reasonable bet, probably benefiting from M&A.

 

While “the market” is focused on reported inflation, consumers are not. Using the experience of retail consumers during Amazon Prime Days, the average order was $54.05, up only 3% from last year. A significant increase in buy now, pay later shows that consumers are managing their cash carefully.

 

According to a recent survey, 40% of asset owners are considering indexing. Equal weighting is gathering attention, a positive initial change that perhaps leads to active management later. The more investors congregate in the center, the less buying competition for attractive securities. However, for the best-selling opportunities buyers will have to wait until the too easy choice of the center becomes lonely.

 

Analytical Conclusion:

The current large-cap, growth leadership is unlikely to lead competitive investors much longer.

 

Despite the media hype that we are in a new “bull market”, investors for the most part are considering other issues. Top and bottom prices are established in the market, not through highs and lows in a calendar year. Using historic peak prices, the DJIA is 6.63% below peak, the S&P 500 is down 6.46%, and the NASDAQ is off its top price by 13.77%. We have therefore not been in a bull market. One can view what we have experienced as a rally or a correction. The NASDAQ Composite, the best performing index, hit its high on 11/19/2021. On that basis, we have been in a “bear market” with rallies for almost 2 years. This could be the first part of the feared stagflation, which could last for many more years, using history as a guide.

 

The Major Empire Cycle

One oversight of our Western European focused education system is not studying the repeated failures of various empire cultures around the world, not only in government but in business too. These problems could be avoided.

 

World trade is often the litmus-test relative strength evidence of growing and declining empires. We are entering the test period now. The World Bank noted that China contributed one half of annual world growth over the past few years. Due to current disinflation and deflation readings from China, it is expected to contribute only one third of the reduced size of world growth this year. This weekend The Wall Street Journal had a front-page headline stating “China’s Slowing Growth Has Many There ‘Losing Faith’ “.

 

Instead of the US taking a victory lap, we should be concerned. The math of the situation is that China’s import of US goods and services is dependent on their dollar earnings from Chinese exports. This is on top of Washington’s vote buying efforts restricting risk-oriented investment into the US. Odds are, a top-down Washington directed industrial policy is unlikely to produce positive results quickly.

 

One of the lessons I learned from college fencing was to respect my opponent and his abilities, including some that were not obvious. I feel the same way about China. Even though I have visited Beijing (central government), Shanghai (commercial power), and Shenzhen (industrial development) over the years.  I also spent additional time in Hong Kong where we had an office before HK was returned to China. I do not claim to understand how China really works. It however has one of the longest written histories of any large society, so I know it does work.

 

China has had some form of central government for at least 3000 years. Only rarely has it been ruled by an invader. Most of the time it has been ruled by a succession of dynastic families. Failing dynasties have periodically been replaced by palace revolts or revolutions from the south. During this long period it has been the leading country of the world at times, as well as its scientific leader. At one point it had the most powerful navy in the Mediterranean, before recalling it to be burnt due to politicians at the court not wanting any foreign entanglements.

 

There are two reasons for mentioning this. The first is to acknowledge the world power potential China could have had. The second is to demonstrate that China has always had an isolationist stance. Roughly 90% of its inhabitants are classified as Han Chinese today. Many other ethnic groups within their borders are carefully monitored. The largest being the 3 million Uyghurs and other Muslims which arrived before Marco Polo.

 

During the Song Dynasty (960-1279) there was a great deal of scientific advancement. This advancement was probably based on algebra, which the Chinese invented. Arab traders later used algebra and introduced it into the Muslim and European cultures. Other inventions from China were the abacus, gunpowder, binary code (genetic sequencing), paper making, and printing.

 

The basic unit in Chinese culture is the family. Families are often grouped into Tongs, some of which have led to Dynasties. Loyalty stretched from the family unit up to the courts of the leaders. Most of these units had a singular leader, generally the most powerful man and only rarely a woman. Even today, most groups are led by a dominant male.

 

The present leadership views its power as being derived from providing jobs, housing, and food for its citizens. At the moment there are no known potential rivalries for leadership. However, those on top are undoubtedly concerned about the large number of youths between 16 and 25 without jobs. They are not accepting low-level jobs below their educational expectations. There is two-way traffic for young smart people. Most move to western countries, preferably the US, when given the chance. However, there are a small minority working in the US who experience bias against them and return home, where they are welcomed.

 

Housing is another problem. While a lot of apartment building have been initiated, many are incomplete because builders spent the deposit money on marketing and other unfortunate expenses. The government, mostly through the provincial governments, is trying to help, but progress appears to be slow.

 

Two Conclusions:

1. China is having recognized economic difficulties. However, their disappointing 5% goal for this year is many times larger than the somewhat rigged 1%-2% growth in the US, and no growth in Europe.
2. China in the long run has some built in advantages, such as the Central Asian railroad into Europe which is being built to sell their improving quality goods. Their second big advantage that has become clear to the world is the poor-quality US government leadership, stretching from Afghanistan through Taiwan and into Ukraine. While China is having growing pains, the US is retreating.

 

Under these circumstances it is probably prudent to include some Chinese assets for global diversification as an important hedge against our problems here.     

 

 

 

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Mike Lipper's Blog: Retro, Forward, & Cycles - Weekly Blog # 792

Mike Lipper's Blog: Gravitational Waves & Investing - Weekly Blog # 791

Mike Lipper's Blog: Manageable Risk - Weekly Blog # 790

 

 

 

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Perspectives: Risk, Liquidity, Duration, + Concentration - Weekly Blog # 690

 

Mike Lipper’s Monday Morning Musings

Perspectives: Risk, Liquidity, Duration, + Concentration

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

Risk

Risk is the penalty for being wrong resulting from the loss of financial capital, time spent and the opportunity to improve returns. I believe it is impossible to avoid all risks. I attempt to identify as many risks as possible and manage these risks by addressing them. All assets have imbedded risks, whether we can identify them or not. As I invest internationally and assume some of my perceived obligations will outlive me, I make provisions for addressing these issues with what I leave. These perspectives color my investment thinking.

Liquidity

Liquidity is the ability to buy or sell any asset at any given time. One can easily rank the salability of any asset, from cash in home currencies to the sale of heavily-indebted unique real estate. For the small securities investor size is not normally a problem, as long as practices and regulations don’t change. However, for the very large investor liquidity can be a hurdle that delays action. It can be costly or in rare cases prohibited. While this is not the case for the average investor, the liquidity price for a large investor can temporarily impact the price for all investors. Take the mandatory quick sale of large assets. They could scare the other market participants into withdrawing from the market or participating only at a substantial discount. If all the gold in Fort Knox or all the assets of gigantic investor had to be sold in the next 24 hours, the price would not resemble the previous day’s price. While these are extreme and unlikely events, last week’s average performance of US diversified mutual funds shows the importance of size, as shown below:

Average Total Return Performance US Diversified Funds

For the week ended July 15, 2021

        Large-Cap    +0.74%

        Multi-Cap    +0.18%

        Mid-Cap      -0.31%

        Small-Cap    -0.68%

Thus, in one week the transaction value of small-caps fell 1.42% compared to large-caps. One might call the difference a liquidity preference or discount. Why does it exist? Many institutional investors prefer to invest in a relatively smaller number of large-cap stocks rather than investing in many more small-caps. Most passive funds are heavily invested in large-caps. Additionally, I suspect the shift from brokerage-commissioned retail accounts to wealth management discretionary-fee accounts have increased the use of large cap securities. 

This phenomenon is not inevitably bad for the small cap investor. Small cap stocks are more plentiful on the NASDAQ than on the “Big Board”. For some time I have suggested the NASDAQ is a savvier market, it went up the most and is currently declining the most of the three main stock indices. I often find more attractive investments in stocks having fewer institutional holders. These days institutions tend to move more like a heard than investments in less popular stocks.

Duration

Duration is a concept applied by bond investors focusing on the yield and maturity of bonds. I believe a somewhat similar concept should be used in selecting equities. A common analytical technique is to divide stocks into “growth” and “value”, leaving perhaps 1/3 of the universe with two horses in their stable. Over an extended period, this may produce a more satisfying and less volatile result. The key metric for “growth” companies is an expectation of growing faster than the economy. For value, the metric is expected share price movement. These two metrics are quite different, the only concept they should share is how long it takes to reach their goal. 

For “growth” stocks the critical question is, will future earnings justify today’s often over inflated price. Today there is a belief you are buying at a bargain price because future earnings will be so large. For example, if a stock is selling for 40 times current earnings, it could be conceived as selling at 10 times future earnings, if they are five to ten times current levels. This makes paying a high price today acceptable if future earnings are expected to deliver. The key to this assumption is the level of earnings and how long it takes to reach that required level. The second factor is a length of time or a duration.

The analysis supporting a “value” recommendation is far less patient. A stock represents value today if and when the market recognizes the value. Value recognition is most often caused by outside forces, such as economic growth, changes of input/output prices, market share changes, acceptance of new products and/or management. Sentiment can change much quicker than actual fundamentals. After long periods of lagging stock performance, a change in sentiment can bring dramatic price performance. Thus, the history of value stocks is that they can be volatile, producing sharp gains and quick declines once value is recognized. Therefore, in our mathematical analysis value stocks have a shorter duration. This is appropriate because a substantial portion of the gain is not internally generated compared to growth stocks.

Should one invest in growth or value? In examining eleven time periods the average growth fund did better than the average value fund eight out of eleven periods. (Please contact me if you want to see the details.) What is perhaps most significant is that since the trough on March 23, 2020, both growth and value funds gained 69%. This suggests to me that the bulk of a risk-aware long-term portfolio should be growth oriented, both domestic and international. Some well-chosen value driven funds should also be included, with particular emphasis on small and mid-cap funds.

Concentration

Examining the long-term performance of mutual funds and less-public portfolios, the better ones tend to be more concentrated. This is easy to understand, the wining positions get bigger and the losers get smaller or disappear. A classic example is one $75 billion growth fund. It has 46.9% of its portfolio in its ten largest positions, with 35.9% in the top five and no cash. In eight periods, from one month to fifteen years, it has beaten the S&P 500 all eight times and the Russell 1000 Growth six times. What I find of interest is that in no period did it beat its index comparisons by three percent or more. This suggests to me that it produced this record with the managers using largely the same stocks as the indices, exercising not only stock selection capabilities but also portfolio manager skills, demonstrating both are needed to produce good results. (Their report is available to subscribers. We have a small position in our managed accounts.)

Working Conclusion

If the equity market in the US is envisioned as a long race for humans or horses, I would say leadership is changing as the newer leaders pass tiring racers. The current low volume in the market appears to be the lull before a storm. Maybe we are hearing the early notes from The William Tell Overture as the storm gathers.

Any thoughts you would like to share?    

        

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https://mikelipper.blogspot.com/2021/07/sentiment-appears-to-be-changing-weekly.html

https://mikelipper.blogspot.com/2021/07/independence-day-3-investor-lenses.html

https://mikelipper.blogspot.com/2021/06/what-did-fridays-market-political.html

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Investment Selection: “Horses for Courses”

Introduction

Each tool has its best single application. Each investment strategy has its best single application. In a similar fashion horse racing professional handicappers have often stated that there are "horses for courses." Meaning certain horses run better at certain race tracks than others. The most productive implementations of these choices are often the function of changed conditions from the immediate past.

As fund performance analysts and investment managers we have been urged to proclaim that past performance does not guarantee future results. Nevertheless all too many institutional and individual investors use past performance and particularly recent past performance as their primary selection screen. Many have taken this to the ultimate decision by investing the bulk of their money in Index funds.

The source of much of my analytical thinking came from handicapping horses races which is what track aficionados call analysis. The daily Bible reading for handicappers is the Daily Racing Form, (in  my day it was the Morning Telegraph.) In these pages the racing record of each horse is shown. From an analytical standpoint what I find of greater value than number of winning races are the conditions of the race to include which track, distance, time of the winner, time of the particular horse, weight carried relative to others, training times and conditions,  plus the names of the sire, dam, and sire of the dam and finally the conditions of the track. Professional analysts and portfolio managers can translate these factors into various selection screens in picking stocks, managers, and funds.

Selecting Investment Strategies for Different Portfolios

When choosing a bet in a race it is wise to start looking at the most popular which is called the favorite. The favorite is based on the most money being bet, not necessarily the horse that has the highest probability of winning. At the track and around the Investment Committee table most decisions are based on avoiding embarrassing losses, not optimizing the chances of large winnings.

The way I handle this challenge is not to bet on each race or every stock that is currently performing well. This tends to produce fairly concentrated portfolios of stocks, managers, and funds. The long-term (but evolving) focus is on a high aggregate dollar win/loss ratio. If you will, I am describing a contrarian bettor. However, as a contrarian, I should not disregard the weight of money bet on the favorite. This is even more true in investing than at the track because by definition popular stocks attract cash flow. In the short-term some investors can make them appear to be right.

Understanding the Investment Favorites

According to Moody’s^* “Globally 10% of all public companies account for 80% of all profits.” Therefore these companies have less credit risk for their bonds. Also, almost by definition, they are large capitalization equities. With the goal of reducing the chances of losses, most investors prefer large-cap stocks or funds. This is particularly true for endowments. 

Endowments are one of the four TIMESPAN L PORTFOLIOS^®, and depending upon on the needs of the account can be aggressively or conservatively invested.  Many of the standard endowment portfolio managers are getting frustrated as it has been a year on Monday since the S&P500 has hit a new high, and for the last four weeks the DJIA has been declining. (Perhaps there is some validity to the pre-air conditioning ditty of “Sell in May and go away.”)

The frustrated investors, the media pundits, and the various sales forces have not been paying attention to Charlie Munger, Warren Buffett, and their two investment associates. As a group, Berkshire Hathaway^* has been selective long-term buyers of stocks and companies. As the oracles of Omaha have often said, they like declining markets for their long-term holdings. Despite what they recommend for others, they are not buying an S&P 500 Index, they are selectively buying a small collection of Large, Mid, and Small-Cap stocks.

I believe that size does not define a stock as a good investment, but due to size many stocks have increasing difficulty making progress. (This does not mean that investors are blind to the attractiveness of some Large-Caps in their recent purchases of Apple^*, IBM, and Wells Fargo^*.) One of the reasons that they are more active now than when there is more enthusiasm in the market is Charlie Munger’s belief that is wise to buy a good company at a reasonable price rather than a less good company at a good price.

Applying Betting Principles to The Preakness

In a postscript to my blog that commented on The Kentucky Derby,  I urged bettors not to bet on its winner to Win the second race of the Triple Crown for 3 year-olds. I suggested to find a good Place bet. (A Place bet pays off if the horse comes in first or second, a Show bet pays off if the horse comes in first, second or  third. The pool  of money that is used to payoff winning bets is divided into three parts for a Show ticket, two parts for a Place ticket and one part for the Winning ticket.  Thus it is normal that winning tickets pay more than Place tickets and Place tickets pay more than Show tickets.) I felt the dollar odds would be larger if the Derby winner came in first. This was before I knew that the track would be muddy on Saturday, and based on past experience was an advantage to the eventual winner. Racing luck and jockey skill  produced the result. Regardless of the change in track conditions, my suggestion to make a Place bet on a non-favorite was valid.  On a money basis a $2 Place bet paid $3.20 whereas the favorite, which came in third, paid $2.20.

^*Stock owned in a managed private financial services fund and/or personally.

Question of the Week: What methods do you use when investing in Large-Caps and Small-Caps?

_________________

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My Investment Worries

Introduction

Essentially investment risk is not a number. The price of risk failure is the foregoing of important funding plans. In that light your risk is not the same as my risk. Not only because we have different financial and personality resources, but also different time frames, which is why I developed the TimeSpan L Portfolios^TM. These help isolate the impacts of risk failures; e.g., a disappointing short-term portfolio is different than one to help fund future generations.

No matter which is the planning time horizon of a portfolio there is another major difference between two similar portfolios. In this age of optimization many portfolios project funding out of resources with little to spare for unexpected mistakes. For many there are no reserves for mistakes because the investor or his/her manager has supposedly identified all possible disruptions. Thus, they have created an expectation risk. Thus, they need to examine what could go badly wrong with their expectations.

I suggest the biggest impact of an expectation risk is likely to be found in the very assets that most investors have the highest level of confidence. Not only by nature I am a contrarian, I am a student of history that gets uncomfortable when there is excessive enthusiasm. My current worry risk is as follows:

• The US $
• Large Cap Stocks
• Treasuries-US and some Others
• ETFs and other market structure changes

These worries are not generally recognized in market prices, which I think they should be. Therefore I perceive significant market price distortions that don’t recognize that in the future something could go wrong in most portfolios.

The worries

Part of my worries is that few if any professional investors are publicly concerned about the concerns that are on my list.

The (mighty) US Dollar

For those of us who live in a competitive price environment we are very much aware of the price spread for similar, usually not truly identical, items. There are always reasons why the bulk of buyers and sellers can identify with the current price; e.g., availability, ease of transaction, easy to service, and other qualities of merit. As an entrepreneur I always wanted to be the high priced service sold to discriminating, great capital sources. My approach was that my successful pricing was a badge of high quality. I was conscious that this policy was holding up an umbrella over cheaper competition, but in the institutional world quality usually trumps price, within reason.

Turning to the current valuation of the US$, the widening price spread versus all other major currencies suggests to me a leaky umbrella. Our current exalted position is not due to our virtuous qualities of protecting the purchasing power of our currency but rather it is due to the perceived decline in value of other currencies. Some of the weaknesses in other currencies are self imposed by the deliberate mercantile policies of governments to help sales of their exports to the US. In a period of increasingly unpopular governments within their countries and with their neighbors, people are choosing to store some of their wealth in the US, behind its supposed two ocean fortress sitting on valuable natural and human resources. Because the US monetary leadership is having enough trouble attempting to manage the domestic economy and a current Washington political establishment that would like to isolate the US from others’ problems, there is no desire to establish the US dollar as the single world currency. Thus, at some future point the unannounced but real weaker US dollar policy is likely.

In the future various economies will start growing again and become attractive places for investment both by the locals and those from outside. Therefore it would be wise to hedge one’s longer term portfolio against continued dollar strength. A number of mutual fund investors have been doing this for some time. With the exception of the five trading days ending December 24^th, traditional US mutual fund investors have been adding to their non-domestic holdings while redeeming some of their domestic fund holdings. (The latter move could very well be a normal pattern of mutual fund investors exiting for retirement and other needs. In most cases the domestic funds are the oldest of their holdings.)

The leaky large-cap house

If the US dollar is being held up by a potentially leaky umbrella, the investment houses holding large-caps may start to leak soon. We acknowledged in last week’s post that in general large cap mutual funds in 2014 were performing materially better than smaller market capitalizations funds. At present and historically there is no solid evidence that large cap companies will do better than smaller caps. The foreword of Charlie Ellis’s book, What it Takes states that “None of the ten largest corporations in the U.S. economy in 1900 still ranked in the top ten 50 years later and indeed only three actually survived as companies.” In addition there is an article by JP Morgan Asset Management that since 1980 the S&P 500 has dropped 320 stocks or roughly 10 per year due to mergers, low volume, and an inversion of their tax headquarters. The problems that caused these results were more widespread with numerous large companies losing their advantage. Some possible victims of these deteriorations today might well be General Motors, IBM, and Citigroup among others.

Turning to the large-cap stocks as distinct from the companies themselves there are significant changes occurring. First the surge of stock price performance above the level of earnings progress may well be a warehouse effect. In the past when investment managers were concerned about not being invested in a market that was gently rising to flat before a perceived decline, they hid from their clients by investing in stocks of very large companies. AT&T was the best of the warehouses with its $9.00 predictable dividend which hadn’t changed for about 40 years. Today, many of the tactical players have shifted to using Exchange Traded Funds (ETFs). In the week ending Christmas Eve approximately $1 billion flowed into two S&P 500 ETFs (net of their redemptions) out of $23.7billion. Some of the inflows could be covering shorts. As of December 15^th the SPDR S&P500 ETF had the second largest short position of 240 million shares. (The largest was our old warehouse name but applied to a different company, AT&T.) More on the changing market structure through ETFs and other derivatives below.

The current market sentiment may well be changing from complacency to belief in a general recovery starting in the US and haltingly going global. One clue that this could happen would be that in 2015 Small Market Capitalization stocks once against perform better than larger-caps. We could even see some flows from the larger caps into smaller cap funds. Due to ETF players who are mostly faster trading institutions we could see redemptions in various index funds as sentiment shifts from avoiding losses to picking exploding winners.

Treasuries discipline

Surprising the US deficit is declining due in part to the sequester in 2013, but it is still a deficit which does not include the off-balance sheet liabilities for various government programs. We have not taken the pledge that except in times of war to produce surpluses to retire our debt. One also needs to recognize our twin infrastructures in terms of roads and bridges as well as our growing educational deficit. We are not alone in our lack of discipline; most other countries are similarly addicted to deficit spending. For those of us who can choose not to invest in various governments’ securities this lack of discipline is an additional imponderable. However, for our banking institutions it should be a considerable issue as banks in most countries must own local government paper. Often the various authorities treat government paper more favorably than commercial paper in terms of the level of reserves required. Thus, to some extent our whole financial system is exposed to the level of discipline applied to our treasury deficit machine.

ETFs and other market structure changes

Students of warfare often note that changes of weaponry change how battles are fought and won. Clearly the introduction of the English Long Bow and the Aircraft are two examples. In the investment marketplace battles, some rely on the most current weapon which is often not fully tested. The 1987 market fall is a good example of a market collapse that was not tightly tied to an economic collapse. In a somewhat over priced market after a multi year rising market, many institutional investors felt secure because of their newly acquired weapon of “portfolio insurance.” This procedure was based on locked-in trades of securities and derivatives largely executed in Chicago. If markets were functioning normally with other investors using the various tactics of the past, a limited amount of portfolio insurance transactions apparently worked. However, as the decline accelerated many institutions and some trading organizations withdrew from the market and so the locked-in derivative trades were working against each other in driving prices into a free fall.

In 2014 and beyond the popularity of derivatives, particularly ETFs, have grown and now often represent the bulk of trading in an emotional period. To put the size of the ETF power into perspective the following points are worth noting:

1. While the estimated net inflow into traditional US mutual funds for the Christmas Eve week was $12.8 billion the highest since March of 2000, almost twice as much ($23.7 billion net) came in through ETFs. As Blackrock’s Larry Fink has been warning for some time, institutions are using ETFs instead of futures to speculate. 
2. There are roughly 250 authorized participants in the creation and redemption of ETFs. In many if not most cases these participants are acting for institutional clients. Some of the participants’ purchases may be to aid in setting up short positions or providing  securities to meet share lending requirements. To put the importance of the shorting of ETFs shares in perspective it is worth noting as of December 15^th seven of the largest forty short positions on the New York Stock Exchange stocks were ETFs. As of the same day, nine of the thirty largest changes in short positions were for ETFs. Because of particular interest in the S&P Biotech ETF the short position would take 17 days to cover.
3. The use of derivatives in both fixed income and currency trading is extensive.
4. Some of the regulators and I are wondering whether several of these new weapons will blow up certain users and possible counterparties in the heat of battle.

How does one live with the worries?

One must recognize that probably there has never been or never will be a period without worries. Long-term investors need to be both flexible and diversified. In our four timespan portfolio structure, I suggest that the Operational Portfolio (1-2 years) stay tactical and not take large losses. In the Replenishment Portfolio (2-5 years) one should develop both tactics that can tolerate at least one to two poor years. The Endowment portfolio (5-10+ years) should shift to a more strategic view to take advantage of periodic declines. The Legacy Portfolio, needed to feed multiple future generations has a need to separate current fashionable thinking for expected future changes.

Question of the week:

Next week I would like to discuss opportunities for the Legacy Portfolio.  To do so I need reasons to believe positively.  Can you help me?

By the time I will be sending my first 2015 post, I hope that each and every one of my blog community has started a healthy and happy New Year.     

__________    

Comment or email me a question to MikeLipper@Gmail.com .

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