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.

 

 

 

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

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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Faulty Comparisons - Weekly Blog # 682

 

Mike Lipper’s Monday Morning Musings

Faulty Comparisons

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

                          

Judgement Traps

When asked how his wife was an old comic replied, compared to whom? While that generated a laugh, it highlighted that some important considerations are not well decided by quick comparisons. Unfortunately, far too many investment decisions are made largely by comparison, with extreme performance judged to be better. 

As someone who has largely devoted his career to making and using statistical comparisons, I am the first to suggest that historical comparisons are not good “divining rods” for making investment decisions. When dealing with the public the SEC requires that a warning be included indicating past performance is not indicative of future results. Unfortunately, this warning is not attached to all comparisons. For example, size, yield, book value, return on asset, equity, sales, operating earnings etc. All that these measures tell us is what happened, not why they happened or even the conditions that may have contributed to the results.

The main reasons there are betting favorites at the racetrack, political campaigns and possibly at the entertainment awards, is that there is a belief that the “smart money” knows something and therefore is worth following. I was recently in contact with some very bright student investors who used a lot of statistical measures to make investment decisions. One of their newer tools was the size of mutual fund holdings and possibly transactions in a stock. I felt this was an oversimplification in their search for the “smart money”. I suggested they separate the fund universe into three buckets:

1. Passive/index funds
2. Funds with net inflows
3. Funds with net outflows

I would totally disregard the passive funds because they are not making considered judgements on individual securities. They should pay only partial attention to funds growing through net inflows and pay particular attention to funds in net redemption. 

Portfolio managers of funds with net inflows generally use the money to either buy more of what they own or begin a position in a new name. If the new name attracts additional future dollars of inflows, that could be of interest. The job of the portfolio manager experiencing net redemptions is quite different. He/she may love all their holdings but must still raise cash. Consequently, it is likely securities with the worst near term prospects will be sold. That could be the most interesting factoid of the exercise. For further insights, I have found it worth following specific funds, particularly when they invest in a new name. (This is exactly the type of SEC warning that would be appropriate, past performance does not predict future results.)

Part of the fallacy of comparisons is a misperception of the appropriateness of the index used to compare a particular stock, fund, or investor. Currently, the largest number of investment accounts hold 10 to 30 stocks and have less than $5 million invested. In these cases, performance comparisons with the major indices are inappropriate. Indices, in terms of the number of securities, represent a small percentage of the number of available securities. Additionally, unlike mutual funds, most stock accounts do not face daily liquidity needs. Most pension funds have limited need to make unplanned sales, thus liquidity is not paramount in their decision process also.

As a young junior security analyst, I thought comparing a steel company in Chicago with those in Pennsylvania was not useful. The Chicago producer mainly sold to nearby customers and had a transportation cost advantage, which they used to get higher prices. Similarly, the degree of internal production of critical auto parts was a major differentiation between auto companies. Thus, I at an early questioner of comparisons without adjustments. 

Applying Comparisons to Future Market Direction

As is often the case, intelligent analysts and portfolio managers see the US stock market going in one of three directions:

1. A major economic expansion
2. At half time in a continuing bull market
3. At a pause before a market storm

In each case, their primary argument is based on a comparison with an indicator. I have listed their views and indicators below, allowing subscribers to make up their own mind.

“Mother of All Recoveries”

This is an economic forecast based largely on a combination of government stimulus and recovery from the lockdown.

Half Time

“Half Time” in a long-term bull market trend, with an occasional correction and a change in market leadership, supported by market analysis.

A Rounding Top that Could Lead to a Bear Market

Through Thursday, the Dow Jones Industrial Average (DJIA) -1.64% and the S&P 500 -1.81% are down from their peaks on May 7th. The NASDAQ is down -4.77% from its peak on April 26th. While the first quarter was quite positive, it is possible the second quarter will be flat to down, with earnings per share gaining the most in the second quarter this year. In the latest week, Precious Metals Funds were up +7.16%, with 118 new lows on NYSE and 230 new lows on the NASDAQ. In the week tax payments were due, Money Market Funds attracted $25.2 Billion.

What Are the Odds of a Top in the Next Six Months?

Mother of All Recoveries   25%

Half Time                  35%

Rounding-Top               40%

Based on these projections, I would prepare to trade portions of the account and be prepared to raise 50% in cash. For accounts with a five-year time horizon, a cash holding of 20% to be redeployed once the market has moved beyond a 10% decline, makes sense. For accounts looking beyond five years, no additional cash is suggested.

Please share what you think?

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

https://mikelipper.blogspot.com/2021/05/extreme-views-can-be-good-lessons.html

https://mikelipper.blogspot.com/2021/05/where-is-stock-market-going-next-weekly.html

https://mikelipper.blogspot.com/2021/05/mike-lippers-monday-morning-musings.html

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Perspectives Change With Your Viewpoint

Inside Out

I am writing this blog in the midst of the Blizzard of 2010. There is something almost universal in the northern climes of the Northern Hemisphere this year, as snow is disrupting travel plans and family functions in many parts of the US and Europe. At the moment, we are lucky, as all of our loved ones are with us or are snug in the homes of the family. Looking out the window from our well prepared homes, the falling snow has a pleasant and mystical glow about it. Our California grandchildren are visiting us and are thrilled, as this is quite a wondrous sight for them.

The very same gentle snow being whipped around by a significant wind is treacherous to travelers and unfortunately there will be many accidents, perhaps some loss of life. At best, the travelers and the various service people will be delayed and made uncomfortable. Looking at the falling snow, their perspective is very different than that from our comfortable place. Just as the difference from being snug at home versus being out in a blizzard changes one’s perspective of snow, an individual’s investment positions also change one’s view on the various markets being tossed around by the elements of supply and demand.

Which Direction is the Wind Blowing?

As the regular members of this blog community know, I am on record believing that the stock markets will challenge and probably exceed their old highs reached in 2007. I learned a long time ago one should never predict both the magnitude and the timing of a price move at the same time. Further, my initial prediction stated clearly that it is unlikely that the first assault on the old highs will be successful. Just as the size of the snow flakes and the speed and direction of the wind are important nuances in understanding the ultimate size of the snowfall and when it is likely to end, there are now nuances that are affecting my earlier market prediction.

The first concern is directed at the likelihood of a strong, sustained surge in the various stock markets. With each new bullish pronouncement by various pundits, the odds decrease on a quick 20%+ move. In the weather sense, all of these talking head comments create a vortex; they are chasing their own tails without providing much in the way of forward movement. They are successful in moving the snow from one snow bank to another, but not moving the storm out of the vicinity.

My second concern is continuing to follow the Barron’s Confidence Index. The index measures the ratio of the yields of high quality bonds to those of intermediate quality. When the index rises it is predicting with some degree of accuracy a rising stock market. Most of the time the index is flat with movement limited to a portion of a single basis point. While any week (and particularly a holiday-shortened week) can be an aberration, the recent decline of 1.4 makes me question the likely near term upward move of the market.

Are New Snow Plows Needed?

The final successful assault on an old high is often led by fresh troops, or if you will, leaders. As portfolios now contain domestic stocks that are not found within the lists of 30 (DJIA), 500 (S&P500) or 3000 (Russell), I tend to use the widest available list encapsulated in the Vanguard Total Stock Market Index fund. A large number of funds are beating this indicator as we are coming to the close of 2010, according to my old firm, now known as Lipper, Inc. According to its December 23d report, and focusing on each of the 20 US Diversified Equity fund averages, eight groups were superior to the higher standard of the total stock market index. (Ten investment objective fund averages gained more than that of the narrower S&P 500. The average Diversified Equity fund also beat the 500.) Perhaps more significantly, of the 20 sector categories, half were better. Normally new index highs are led by an over-weighted concentration of investments in the index. We may be slowly marshalling the strength of the leadership needed to breach the resistance likely to be found at the old high points.

Each week we look at the performance of the 25 largest SEC registered mutual funds. Using the same benchmark as we did above, only SPDR Gold fund gained more this year. As these 25 funds were the largest, they were the leaders of the fund business. Over the last five years 15 out of the 25 produced better results than the broadest measure. Following military tactics as I learned them, the final assault will rely on the big guns.

Currently, Small Capitalization Beats Large Capitalization

In looking at this year’s performance, it was the relative size of the market capitalization in the portfolios that led to the better performers. The best performers were the small caps, closely followed by the mid-caps and further down the line the multi-caps. On average, all three of the large cap categories, (growth, core and value) underperformed. The chances of a successful breach of the resistance at the former highs will, in my opinion, rest on large cap performance. In particular, leadership by large cap growth funds would set the tone for the sustained optimism required to bring most investors out of their snug homes.

In the Meantime

During market declines investors often make lists of stocks with attractive buy prices. My guess is that seldom do these lists get fully utilized. However, the technique can be applied now, probably with good effect. Many of us have portfolios embedded with significant unrealized capital gains. As mine do, these portfolios have a few or more holdings that are currently being held at a loss relative to purchase price. In general, I believe one’s entry level into a position is a historic accident when viewing future transactions. However, if you choose to continue to hold a losing position after a year of generally rising stock prices, you must believe that the loser will morph into a butterfly and fly up to the sky. If that is your view (or your handcuff), before year-end you should buy more of the loser. Next year you can choose to reduce your position after 31 days and lower your entry cost. I suspect that as we mount our move to higher levels, the sustained loss will have value to offset new gains. If you are not willing to buy more of an investment, particularly a losing one, shouldn’t you free up your capital for better uses?

These are my thoughts during the Blizzard of 2010.

May 2011 bring to you every bit of happiness you desire.
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