Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

 

 

 

Mike Lipper’s Monday Morning Musings

 

Increase in Bearish News is Long-Term Bullish

 

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

 

                             

 

Another Term for History: Uneven Cyclicality

In describing the behavior of people and other animals the terms of optimism and pessimism are appropriate, particularly the extreme emotions in overcoming risks. These actions drive all kinds of markets, including climates. Extreme increases and decreases occur irregularly, with people forgetting the pain caused by collapses.

 

We may currently be entering a negative economic cycle, possibly caused by an exaggerated political cycle. The biggest danger in focusing on the probable down cycle is retreating from a continued effort to search for early up-cycle clues.

 

A lawyer who practiced at a bank during the Great Depression mentioned that he hired workers every day to work on bad loans. During this period there were some activist investors who purchased defaulted securities, hoping to hold them for a partial or full recovery of face value. Some of the more well-known players were Ruth Axe, Max Heine, Ben Graham, and David Dodd, among others. Current conditions are not yet at this level of pain, but some smart people are examining the potential for such a period, both in the U.S. and elsewhere.

 

What is Happening Now?

Moody’s (*), in its latest proxy statement, predicted a continued multi-year decline. PIMCO is reluctant to buy long-term US Treasuries. Small and Mid-Cap stocks are dropping more than large-cap stocks on down market days because there is only liquidity in large-cap trades. This suggests that sizeable positions may have to be held until there is a sustained recovery.

(*) Owned in client and personal accounts

 

The two major consumer confidence surveys showed sharp drops in their March reports. One long-term negative factor facing the US is the relative unproductiveness of the entire educational process for investment capital. In the public school system, the number of administrators has increased eleven times the rate of growth in the number of students. (Sitting on a number University boards I have seen the same tendency at their level.) The mental health needs of the students have almost become a sub-industry. Many homes are not effective educational sites either.

 

What are the Investments Prospects?

As someone who basically learned analysis at the New York racetracks, I turn to the availability of numbers and ratios. Most dollars invested in equities are for funding needs beyond ten years. Consequently, I am using the median investment performance of the larger peer groups of mutual funds for the last ten years, as shown below:

    Large-Caps      8.50%

    Multi-Caps      7.92%  

    Mid-Caps        7.57%     

    Small Caps      6.82% 

    International   5.19%

(I think the overall range of 8.50% - 5.19% is a reasonable compound return for the next 10 years, considering the two years of 20% or more in the last 10 years. However, I don’t think the rank order of the peer groups will work out the same as it has in the past. Large-Cap performance is too heavily dependent on a concentrated group of high-tech companies. Small and mid-caps should benefit from buyouts and the movement of talent from larger companies to smaller companies. International funds may be the beneficiary of reactions to US government actions. I recently added Exor, the Agnelli family holding company, to my personal portfolio.

 

With so many controversial views expressed, I am interested in learning your view.

 

 

 

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

Mike Lipper's Blog: Odds Favor A Recession Followed Up by the Market - Weekly Blog # 881

Mike Lipper's Blog: “Hide & Seek” - Weekly Blog # 880

Mike Lipper's Blog: Separating: Present, Renewals, & Fulfilment - Weekly Blog # 879

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

“Hide & Seek” - Weekly Blog # 880

 

 

Mike Lipper’s Monday Morning Musings

 

“Hide & Seek”

 

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

 

                             

 

Friday’s Victory Signal?

After an extended period of stock price declines, prices shot up on Friday. The “Bulls” hoped it was the beginnings of a “V” shaped recovery, but some market analysts were skeptical. A strong move often ends when there is a 10 to 1 ratio between buyers and sellers, which was the case with Friday’s 10 to 1 ratio.

 

The Wall Street Journal publishes “Track the Markets: Winners and Losers” in their weekend edition. It tracks the moves of 72 index, currency, commodities, and ETFs weekly. It may be worth noting that only 35% rose for the week.

 

The Second Focus

The media, and therefore most of the public focus on daily price changes. Even with the growth of trading-oriented hedge funds and the conversion of former securities salespeople into fee-paid wealth managers, the portion of the assets invested in trading is less than the more sedate investment accounts invested long-term for retirement and similar institutional accounts. My focus is on the second type, which includes wealthy individuals.

 

The Current Administration is Ignoring Us

The first step in security analysis courses often starts with reading what the government puts out in order to develop a foundation for an investment policy. The current administration is the most transactional in memory. The President, Vice President, and Sectaries of Treasury and Commerce made and lost money on market price changes. This has forced me to find other sources to build our long-term investment philosophy.

 

Inevitable Recessions

Studying both recorded history and our own lives, it tells us that life does not move in straight lines, but in cycles of irregular frequencies and amplitudes. Simplistically, we can divide these movements into good and bad periods. However, an examination of the periods reveals differences in how each period affects us. The differences and how they affect us depends on where we begin each cycle, the magnitude and shape of the cycle, and any surprises along the way.

 

Both up and down cycles are caused by imbalances within their structures, which often occur due to other imbalances known or unknown. Most importantly, any study of cycles indicates they happen periodically and surprise most participants. Even with detailed histories of cycles they can be difficult to predict, although the root cause of most cycles is extreme human behavior.

 

While some cycles are caused by natural weather-related events, most economic cycles are caused by envy and/or too much debt. I am perfectly comfortable predicting a recession will hit us, but don’t know for sure when it will occur. (In a recent discussion with a small group of senior and/or semi-retired analysts, they felt there was a 65% chance of a recession within 12 months.)

 

The fundamental cause of cycles is often the result of people reaching for a better standard of living through excessive use of debt, which often results in a struggle to repay debt and interest. At some point the growing federal deficit, combined with growing consumer debt, as evidenced by credit card delinquencies, will force a decline in spending. Reduced spending will lower GDP and production. The fact or rumor of this happening is enough to bring securities prices down.

 

Confusing Hide and Seek

Hiding is not the solution to avoiding a loss of purchasing power, both actual and supposed. Cash is the only true defense, although it is not a defense against inflation which reduces the purchasing power of most assets. However, the biggest long-term loss from hiding is foregoing future potential high returns.

 

Our Approach

I believe a cash level no larger than one year’s essential spending should cover the crisis bottom. Most of the remaining capital should be devoted to seeking out substantial total returns that can produce multi-year gains.

 

Where are these Gems?

Bargains are usually hidden in plain sight. One example might have been the fourth quarter 2024 purchase of European equities, which were priced for a European recession. However, European equities actually generated expanded earnings from Southeast Asia, Latin America, and Africa. (In a recent discussion with one of the largest investment advisers negative on investing in Europe. Their views were based on their continent’s own economics, while paying insufficient attention to companies growing profitably in the aforementioned regions)

 

Thus far in the first quarter I have been lucky enough to own both SEC registered mutual funds and European-based global issuers. (It took patience because earlier performance periods were not good.) This shows the need to be courageous when seeking future bargains. 

 

We would appreciate learning your views.

 

 

 

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

Mike Lipper's Blog: Separating: Present, Renewals, & Fulfilment - Weekly Blog # 879

Mike Lipper's Blog: Reality is Different than Economic/Financial Models - Weekly Blog # 878

Mike Lipper's Blog: Four Lessons Discussed - Weekly Blog # 877

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Fundamental Changes Occurring - Weekly Blog # 755

 

Mike Lipper’s Monday Morning Musings

Fundamental Changes Occurring

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

            

 

 

People are changing their attitudes about what they do with their money and investments. Failing to define their changed concerns about the future, they are not happy. They appear to fear more fundament changes than just a relatively simple, shallow and quick, cyclical recession.

Without fully defining the cause of their fears, they are moving their cash and investment around slowly. Third quarter statements for leading commercial banks are showing increased deposits and the purchase of fixed income securities and loans. For their own accounts, leading banks are raising their bad debt reserves.

 

Liquidity

Jaime Dimond, the CEO of JP Morgan Chase, is worried about a possible future stock market decline of 20% due to credit concerns. Concurrent with liquidity concerns in domestic and international markets.

Most non-trading investors are unconcerned about the amount of capital on trading desks. This capital is needed to provide immediate support for transactions resulting from sudden and sizeable events. Last week, a well-known high-quality financial services stock had quite a day. After closing at $98.07 the prior day, it opened at $94.99 after a bad earnings report, then dropped further to $93.53 before rising to $102.66, finally closing at $101.96. Trading volume on the NYSE was higher by 1 million shares for the day. While the earnings report was less than expected, the closing price was roughly in line with prices paid over the past couple of weeks.

The price action of the stock suggests the NYSE market-makers did not have enough uncommitted capital to cushion the opening trade and early morning trading.

An indication market-makers are undercapitalized. This is a worry for all institutional sized investors owning shares listed on the “big board”.

 

Stock Strategy

Most of the time investors select stocks similar to each other, regardless of market capitalization. This is not currently true, with large-capitalization growth stocks leading the way since the June lows. However, smaller caps have been led by “value” stocks. This dichotomy is probably based on the belief that large-caps are more liquid than smaller-caps. Additionally, the average small cap value stock is cheaper in terms of price/earnings ratio.

However, if one sees the next market as essentially a recovery from the decline, you would be attracted to large cap growth, now selling under stock prices of two years ago. International mutual funds on average have three years of poor performance to recover from.

If you believe the next major move is a recovery, then large caps make sense. People currently find the low S&P 500 price of 3583.07 attractive. I am not such a believer.

Odds favor the next “bull market” having a largely different leadership than the last. In part, leadership will come from corporations positioned to be providers of products and services to a restructured world.

 

Public vs. Private Investments

Since the sailing ship days investors have profited from “carried interest” earned by ship captains and others on solid land. They benefitted from the price spread between what the owners of the ship paid for the merchandise and the price the captain negotiated upon landing. Carried interest is the source of wealth for Italian cities and Boston financiers nurturing the owner’s and captain’s wealth.

The same procedure was used by these firms when they invested in private companies. Boston law firms also used the same approach when they began investing in “privates”. (When I started visiting these law firms in the 1960s, they had more money under management in their trust-departments than mutual funds. They also had professional security analysts on their staffs.

Carried interest was used to connect portfolio people and salespeople with their wealthy families. The private equity business was founded through this union and grew significantly to include wealthy individuals and non-profit institutions.

Two other aspects beyond capital gains tax treatment aided their growth. A forty-year bond bull market generated capital to invest in private equity and private debt at very low interest rates. The privates also had a second advantage, their investors were trained to wait three to twelve months to see their investment returns. (By then their poor performance was not as painful as publicly traded investments reported with a one-to-ten-day delay.)

All of this is in the process of changing. There are now many providers of private funds with lots of spreadsheets. Interest rates have risen on leveraged capital. Many private funds are now investing in public securities and an investor or prospect can somewhat triangulate the private fund’s results. Private funds typically launch a new vehicle as soon as they can, often before the prior fund is fully invested.

I believe a handful of these funds will continue to produce good results. However, even these funds will be pressured by higher interest rates, competition for talent, and stronger negotiating people in operating companies. Only a few will produce exciting records.

 

Conclusion: Use dollar cost averaging to invest in good companies not already represented in your portfolio. The slower the better.

 

 

 

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

https://mikelipper.blogspot.com/2022/10/are-we-there-yet-weekly-blog-754.html

https://mikelipper.blogspot.com/2022/10/begin-to-dollar-cost-average-equity.html

https://mikelipper.blogspot.com/2022/09/if-not-bottom-then-what-weekly-blog-752.html

 

 

 

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

  

Does the Decline Influence the Recovery? - Weekly Blog # 723

 Mike Lipper’s Monday Morning Musings

Does the Decline Influence the Recovery?

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

Positioning

As a contrarian I am comfortable sharing my view of the market with the majority. Sharing this view is not done to stand out among a crowd of students of the market, but to attempt to position myself and the accounts for which I hold myself accountable. Over time, the rate of return earned by the majority is less than some of the minority, who happened to be right for some reason. With that thought in mind, I will try to focus on the recovery from the predicted downslope we are in, looking across the unknown valley to the beginning of the recovery.

Where are We?

As is often the case, there are conflicting trends. In terms of stock prices, we are in a decline. Until it is finished, we won’t know if the decline is just a trading event, a correction, or a bear market. The media makes a distinction, defining a decline of 10% as a correction and a fall of more than 20% as a bear market. Using the most popular market indices the picture is muddled, with the NASDAQ Composite well into the correction phase, dropping -15.9% from its January high and even more from its all-time high in November 2021. The S&P 500 has flirted with the -10% level. (Based on the present length of the market expansion and the nature of changing stock leadership, I believe that we are heading for a bear market.)

The broader economy is also showing disturbing signs. The JOC-ECRI Industrial Price Index rose 2.8% last week and is up 31.3% for the year. January’s backlog data was up +19.6%, with the number of new orders up only +6.8% and non-durables up only +5.6%. In February, before the Ukrainian invasion, purchasing orders were down -3.8%.

“Buy the Dip” Advocates May Get a Bad Bounce 

This week in Seeking Alpha there were four different recommendations to buy shares of T. Rowe Price (a stock owned in both personal and managed accounts). I have had the pleasure and honor of meeting with all the firm’s Chairmen, going back to Mr. Price himself. I hope my heirs continue to hold these shares, although much like Berkshire Hathaway, I have concerns about a potential change in the shareholder base. The difference is price action may be signaling a long-term change in the valuation of the stock. The low price this week was $137.76, a long way from the 2021 high of $220. What is a bit more worrisome is the $137.76 low on Friday, on 2 million shares of volume. The high for the week on Monday was $145.11, on 1.6 million shares of volume.

I reviewed four recommendations of T. Rowe Price which touted the remarkable financial record of the firm and concluded the stock was a buy. I hope they are right; however, like most current recommendations to buy Berkshire, they dwell on history. When a stock drops by 1/3 and the “market” hasn’t fallen much, it raises questions as to the repeatability of the record. Clearly, if the record is repeated the stock is a great long-term buy, but if not repeated, it will disappoint shareholders staying on board. I have not read any reports questioning the long-term vitality of T. Rowe Price; however, I could dream up some worries that could cause disappointment if they turn out to be correct. 

The following is a brief list of issues that could go wrong in the future, which the firm has not dealt with in the past:

1. Private Equity and Private Debt have been important contributors to the gains in many of the firm’s funds and accounts. Almost every investment manager is fielding similar products. With so many firms raising money in the markets for “privates”, the purchase price demanded by entrepreneurs will undoubtedly rise, while about half of the privates offered to the public through IPOs declined in the “after-market”. One clue this phase may be coming to an end is the SEC demanding more disclosure from this sector. (Nothing like the Police showing up after a crime is committed.)
2. There is a trend of financial intermediaries merging into larger organizations. At some point the larger intermediaries will demand a bigger slice of the profits of the account.
3. Governments are concerned about a large portion of the voting population still without any, or sufficiently large, retirement packages.
4. With more pressure from clients or their agents, fees may come down, regardless of inflationary increases cutting profit margins.
5. An activist government may force advisory firms to go into less profitable businesses.
6. Some large settlements may be awarded by activist courts.

I believe the current management is aware of these and other risks, but bad things can happen to all of us.

Question?

What are the non-present risks that could hurt your investments?  

  

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

https://mikelipper.blogspot.com/2022/02/successful-investing-expects-unexpected.html

https://mikelipper.blogspot.com/2022/02/we-are-progressing-weekly-blog-721.html

https://mikelipper.blogspot.com/2022/02/building-long-term-investment.html

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

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

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

"Blue Wave" Investment Lessons: New Bull Market? - Weekly Blog # 654

 

Mike Lipper’s Monday Morning Musings

"Blue Wave" Investment Lessons: New Bull Market?

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

This is an investment blog, not a political blog. However, there is an uncertain parallel between the two, which happens much less often than the pundits believe. I believe there is a more important link between the two and both move on human actions for unproven reasons. In both cases what we really know are their actions, they do not reveal their deeply held innermost driving motivations at the voting booths or trading venues. Since both arenas produce reams of peripheral data, you can often see similarities thought processes. Thus, it is quite possible that the undisclosed motivations can be teased out, with particular focus on clues to future actions.

“Blue Wave” Investment Observations

Because polling has replaced much of what was previously street reporting, there is a narrowing of sources of information. Various  readily available polls conformed to one another, making it easy to accept them as accurate (the big megaphone advantage). The funders of polls, either the media or the candidates, chose among the cheapest available. (Phone interviews conducted by students or other low paid part timers, filling out preselected forms.)

Individual and institutional investors are bombarded with the views of pundits using their megaphones. Markets, like elections, follow the crowd. (They don’t have the benefit of wagering at the racetrack, where the betting odds are based on the ratio of money bet on a horse compared to the total bet on all horses after deducting local taxes and track fees. They are the original crowd funding mechanism and have very little relationship to the probabilities and possibilities of specific races. The horse with the smallest payoff odds is called the favorite [chosen by the most bets]. History shows that favorites win roughly one-third of the time. Highly favored horses often have payoff odds that are a fraction of what is bet and are called odds-on favorites. They on average win about half the time, but their winning doesn’t fully fund future bets. The odds on the other horses in the race are often called long shots. When they win, they pay off multiples of their original bet.) Successful bettors in politics and at the racetrack always look for long-shot opportunities and never exclude the possibility of a long-shot coming in first.

The belief in a Democrat win was based on the probability that they would raise more money than the Trump forces, which they did. This is similar to believing in Napoleon’s “God is on the side of the bigger battalions” and is like investing in the largest company in an industry. How a size advantage is used is most crucial, a lesson learned by General Bonaparte and some investors. In this case it was relying more on general media than social media for support. We have found that successful institutional investors do their critical analysis internally, with supplemental analysis provided by smaller research shops.

One of the tenants behind the “Blue Wave” projection was the “Great Leader will lead”. Looking at incomplete results, members of both Houses won with bigger percentages of the vote than the top of their ticket, demonstrating once again that all politics is local. The implication being that members already looking to their 2022 and 2024 campaigns don’t owe anything to the top of their ticket. Passage of legislation from the White House is not going to be easy. Democrats in the House Representatives will soon have to select the chairmanship of three house committees. In two cases there are at least three announced candidates, which makes one wonder about the effect of these internal deliberations on the long-term unity of the party.  

As is often the case, the problem with the generation of the “Blue Wave” was the composition of the decision group. Too often, groups try to avoid confrontation and become a cheering squad of sycophants, leading to confirmation bias. Contrarians make most decisions better by challenging the majority point of view. They either reinforce the argument, or force consideration of their contrarian views.

Regardless of the Election: Are We Staring A New Bull Market?

For roughly three months the major US stock market indices have been in a trading range. The market indices of the two next largest economies are also pausing. Both the Nikkei 225 and the Shanghai Shenzhen 300 have risen markedly this year, with the Japanese indicator at a 29-year high, although still about 50% below its all-time high. The internal Chinese market that is opening to foreigners and their own high-saving population, may be waiting for US leadership or looking to act as a hedge against a troubled US domestic market. 

Before we think about the future progress of stock markets, we should think about where we are, and that requires determining the significance of two realities. 

• First, can we treat 2020 as a single event, resting after finishing a ten-year bull market? It ignores both the fastest recession and recovery in history. 
• Second, the valuation gap between so-called “growth” and “value” has widened. In most stock markets the performance gap is approximately 40% and the spread continues to widen. According to the S&P Dow Jones Indices, the five leaders this week were Internet Services +10.18%, E commerce +9.96%, US Large Growth +9.90% and Islamic Tech +9.05%. I am particularly pleased to see the non-US participants, as investing is a global activity and important investment trends tend to jump national borders. As an example of the commonality of thinking in various markets, the following currently have average yields within 64 basis points above 2%: Russell 1000 Value, MSCI World, MSCI World ex USA Small Cap, MSCI EM. 

Assuming the 2020 market and the performance spread are appropriately discounted in current market valuations, I turn to other structural observations:

• Private clients have a lot of cash on the sidelines
• The NASDAQ Composite has been the best performing major index this year, going up most and declining least. I think this will change. Sophisticated traders play a bigger role than at the larger listed market. There are far fewer passive players in the NASDAQ. Active investors read political movements better than those in other markets. I sense they are fundamentally worried and will wait for more clarity on their taxes.
• No market indicator is always right and some are frequently wrong, which in the market analysis world are labeled contrarian indicators. One of the most reliably contrarian is the AAII weekly sample survey outlook for the next six months. After being bearish for a long time they are now more bullish. Subscribers please share your views.

What am I doing?

At my largest custodian the top ten positions represent 50% of the account. Four of the holdings are investment companies and three are relatively narrowly focused mutual funds. I treat Berkshire Hathaway as a smartly diversified trust account for beneficiaries as an investment company. Four stocks are operating companies good at what they do. One is a publicly traded fund management company good at creating newer ways to invest. The final is NASDAQ, which has intelligently broadened its business. For our managed accounts we only invest in mutual funds that can fit the individual needs of each account or portion of an account. 

 

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

https://mikelipper.blogspot.com/2020/11/bigger-risks-than-election-weekly-blog.html

https://mikelipper.blogspot.com/2020/10/managing-mistakes-weekly-blog-652.html

https://mikelipper.blogspot.com/2020/10/momentum-is-slowing-under-too-many.html

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.

Risks and Avoidable Mistakes for 2015

Introduction

For most dollar oriented investors 2014 was an "okay" year with a third year in a row of double digit gains for the S&P 500, but not for the bulk of institutional accounts. Consciously or not, many investors and managers were aware of the length of the present bull market having entered its 61st month. This has created twin dilemmas for the prudent management of responsible money.

First dilemma - Large Cap over-ownership

As regular readers of these posts recognize and true to my analytical history, I tend to view investments through the lens of mutual funds. When simplifying the fund performance data for 2014 by size of market capitalizations the following is revealed:

Large Cap funds	11%
Multi-cap funds (Unrestricted/ or “go anywhere” funds	9%
Mid Cap funds	8%
Small Cap funds	3%

In a dynamic economy the rank order of operating earnings power generation would be in the opposite order, being led by Small Caps or possibly the successful "Go Anywhere" funds. Focusing on operational earnings, excluding foreign exchange benefits, I believe that the Large Caps were producing approximately 3 times the long-term growth of the Small Caps. The better market performance of the Large Caps, I believe, was a function of market structure changes. Some institutional investors being concerned with the duration  of this bull market moved heavily into Large Cap stocks directly or more importantly through the use of ETFs invested in the S&P 500 and other indices. Because of perceived greater liquidity in Large Caps they were hiding out in what we used to call warehouses. With governments all over the world looking to Large Caps being "social progress" engines, I have some doubts as to the growth prospects for Large Cap companies.

Second dilemma - Historical constraints

As is often the case, apparent boundaries come with both hard data and locked-in thought processes. The data is the easy part. While as noted we are in the sixty-first month of the recovery, of the nine last market recoveries, four have been over 100 days in length with the longest being 181 days. Thus for a manager a possible career risk is exiting too soon which puts a premium on investing in liquid positions. Because so many others have made similar judgments as to the better liquidity in Large Caps, if there is a sudden drop in the market, I believe the excessive amount invested in Large Caps will find their exit liquidity either expensive or non-existent for those that are late.

The biggest risk for investors and their managers are the biases that many of us labor with in making so-called rational decisions. The following are a list of these biases as listed by Essential Analytics:

List of biases

Outcome, herding, conviction (the curse of knowledge), recency, framing, band wagon effect, information, anchoring, optimism.

I suggest that many of these biases find their way into reports; supporting in effect, the reasons we all have made decisions that haven't worked out. The key for all of us is to understand our biases. Some biases we will be able to overcome. Others we will have to accept as immutable.

This suggests that when putting together a portfolio of funds or managers, it would be wise to try to diversify the various biases of the hired portfolio managers as well as our own as the owners or fiduciaries of the capital being deployed.

Overcoming biases

I have a definite advantage in this task by personality. By nature I am both curious of what I don't know and often a contrarian. As a contrarian again using the mutual fund microscope, the following may be useful thoughts:

Looking to extremes one might wish to set up a pair trade of being long some of the components in the S&P Latin American energy index which declined -39% vs. the average Indian fund which was up 41% in 2014. In a similar fashion one might start to research funds in the following groups that declined in 2014:

Energy Commodity funds	-34%
General Commodity funds	-16%
Global Natural Resources funds	-15%
Domestic Natural Resources funds	-15%
Dedicated Short-bias funds	-15%

I take some comfort in the contrarian thoughts contained in the headline to John Authers insightful Financial Times column: "The case for gently shifting money away from US." I believe a well-reasoned portfolio should be looking for opportunities on a global basis both in terms of what companies do and where various securities are traded.

Final thought

Many year-end predictions are essentially extrapolations of existing market trends and this could be what will happen. However, I am searching for the beginnings of new trends that will produce +20% or -20% in a twelve month period. I would appreciate hearing your thoughts as to when and which direction (or both) you expect price movement. I firmly believe we will once again experience this kind of action.

__________    

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

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

Did someone forward you this Blog?  To receive Mike Lipper’s Blog each Monday, please subscribe using the email or RSS feed buttons in the left column of MikeLipper.Blogspot.com 

Copyright © 2008 - 2015

A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.