Insights From a Sleepy Week, Important? - Weekly Blog # 784

 

Mike Lipper’s Monday Morning Musings

Insights From a Sleepy Week, Important?

 

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

 

 

 

Sentries Be on Guard

Both military and investment sentries (analysts and portfolio managers) know that the most dangerous part of their jobs is falling asleep before a major, unexpected change. There is a good chance that on the investment front we are being lulled into not searching for changes.

 

In the last six weeks the S&P 500 has moved under 1% each week. Market analysts call such periods accumulation or distribution, which is when securities move into from weaker into stronger hands. The results of which will become known when the eventual breakout/breakdown occurs.

 

Currently, as is often the case, we are simultaneously experiencing two different markets. For example, the week before last S&P 500 stocks continued to have more distributions than accumulations. Last week on the NYSE there were 6.3 million shares acquired at rising prices and 10.3 million shares acquired at declining prices. This is not surprising as the year-to-date extreme performance spread in the DJIA is quite narrow, from a gain of 4.56% to a loss of -1.33%.  The S&P 500 year-to-date gain of +6.96% could be labeled stagflation. Liz Ann Sounders of Charles Schwab reminds us of two other stagflation periods, 1929-1942 and 2000-2009.

 

At the very same time the year-to-date NASDAQ extreme performance numbers show a range of +19.23% to -0.36%. Advance and decline share volumes are also evenly matched at 10 million shares.

 

Currently, the five largest companies are producing better than average index results in most sectors. Contrast this with the week’s WSJ weekly prices of the 72 security, commodity, and currency measures, where 75% declined. The two worst performers were Comex Silver -6.8% and the South African Rand -4.85%, both hedges against the US dollar.

 

Signs of the Future

In the current market most buyers expect an acceptable year in 2023, and a good one in 2024. Sellers expect to have to wait, at least until after the next presidential election. They are being paid to wait with certificates of deposit yielding around 7%.

 

This week we have seen two estimates for 2024. The 2024 estimate for Social Security COLA is 3.1% (It was 8.7% for 2023). Interestingly, the household survey for 2024 came out with an almost identical 3.2%.

 

Longer-Term

In attempting to predict the longer-term I find it is more useful to rely on recognizing symptoms rather than attempting mathematical projections. The largest contributor to world trade is China, where most high-priced purchases are generated by wealthy young people. Recently, they have cut back materially on their purchases of top-line jewelry. I don’t know if any of these purchases hedge against their own currency in favor of the US dollar. (Due to inflation and out of control government bribes the US dollar should decline on an absolute basis. In terms of the value of the US dollar, according to Michael Cembalest of J.P Morgan, any major change is likely to take a long time considering the US only provides 25% of world trade while being used in 85-89% of foreign exchange or similar transactions.

 

On a longer-term basis a more concerning factor is the growth of Chinese science and technology. They appear to be the leader in the development of fusion for utility purposes. This is happening at the very same time US utilities have become the best performing sector, in part because of the expected increase in load to produce transferable energy to the ballooning “EV” market.

 

Portfolio Management Moves Implied

During this lull in market activity before a new phase begins, all portfolios should be reviewed to put them in the best position for the future. One approach is to examine all present holdings currently priced at a loss. Unless one sees a major increase in the next 31 days, they should be sold and selectively repurchased after the “wash sale” prohibition of 30 days.

 

The losses created should reduce potential capital gains from selling some of the winners you are less than thrilled with. By all means, please consult with your trusted investment adviser and tax consultant.

 

Correction to last week’s blog:

In the Berkshire Hathaway discussion, the correct spelling of the first name of the Vice Chairman in charge of insurance was published as Amit instead of Ajit, our apologies.

 

 

 

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Mike Lipper's Blog: My Triple Crown - Weekly Blog # 783

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Mike Lipper's Blog: Early Stages of a New Grand Cycle? - Weekly Blog # 781

 

 

 

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Investors, Politicians, & Other Children - Weekly Blog # 745

 

 

 

Mike Lipper’s Monday Morning Musings

 

Investors, Politicians, & Other Children

 

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

    

 

 

Most investors, politicians, and other children act as if they are the only people that have had to deal with behavioral challenges. However, there is very little in life that is totally new, only the packaging has changed.

 

For example, how should one measure progress, and should it cause action? Most of us have some level of confidence in reported numbers, although numbers are an abstraction of a reality, not reality itself.

 

We are all counters from an early age, and since tradeable money was created have tended to count many of our successes and occasional failures in monetary terms.

 

The problem is the value of money is in the eyes of the beholder. One hundred million Confederate dollars has very little, if any value today.

 

Those dollar bills were on the losing side of a painful war, but we have been on the losing side of an age-old battle since birth. That depreciating value is called inflation.

 

The crux of the problem is the creator of this vehicle of exchange is also one of its largest users. Furthermore, the ruler of the mint or printing press is in a position of strength due to support from the right people. The easiest way to keep their loyalty is to pay them. In imperial Rome it was called “bread and circuses”.

 

In many Roman cities and towns, the amphitheater was larger than the nearby fortress. These were the entertainment centers for the populace who had enough food to eat due to an efficient agricultural system with well-engineered aqueducts.

 

I find it revealing that today’s name for giving money indirectly to the population is derived from a Latin word for stimulus. In earlier days it was called a bribe.

 

When a long-distant trader, Marco Polo, worked along the long Silk Road (1271-1295), the most advanced society was the Chinese empire. It developed gun powder and later developed paper money. Not surprisingly the empire had a large government, with examinations for jobs.

 

From my standpoint, smuggling silkworms back to Europe created a market-based exchange with a sounder form of money, especially when compared to their traditionally weakened currency. This is the way he delt with inflation.

 

In the thirteenth century the Europeans were somewhat protected against inflation due to small indigenous silver mines whose content went into their currency. This lasted into the next century and was replaced by gold and silver produced at low wages in Latin America, starting about 200 years of inflation.

 

When the steady stream of gold dried up the overseas colonies of England and other European countries became too expensive to maintain without substantial taxes. This is the reason a political group in England was not disappointed with the result of The American Revolution.

 

Confidence in the Future is Low

There are a plethora of signs showing this lack of a defined future:

• What are yields on US Treasuries saying? 2-year Treasuries are yielding 3.25%, 10-year Treasuries 2.84%, and 30-year Treasuries 3.07%. The 2-year is inverted relative to the 10 and 30-years!!

•  All 3 of the AAII survey predictions for the next 6 months are in the 30-39 % range.

• While 53% of the DJIA companies were winners for the week, the DJIA lost value in aggregate points. By comparison, only 40% of the companies in the Transportation index were winners.

 

• The JOC-ECRI industrial price index dropped 5.15% year over year.

 

• Exchange traded equity funds continued to suffer redemptions, led by growth and value funds.

 

• Liz Ann Sonders, the highly respected chief strategist from Charles Schwab is not bullish because she has not seen the market capitulate, as would normally be the case near the end of a bear market.

 

My Views

I have been searching for reasons to be optimistic for our long-term investment accounts, as after every bear market there is a bull market.

 

I agree with Richard Bernstein that bull markets don’t start with narrow leadership.

 

I believe economic and market cycles are not just number exercises, which you might be led to believe after reading columns from the various pundits.

 

I believe cycles are critically needed to address severe imbalances, not just trading opportunities. In previous blogs I have listed troubling demographics quality of schooling, healthcare, military strength, and leadership.

 

As I do not see these imbalances being addressed, I am afraid we will experience one or more recessions. There is a popular hope we will avoid a recognized recession, or only suffer a mild one.

 

If that were to happen, it would not likely sufficiently address our problems. I have no doubt our politicians can continue to produce a smoke screen to hide the issues. The current proposed legislation is an example of this, almost guaranteeing a major recession in a couple of years.

 

If that were to happen, much like during Paul Volcker’s tenure where he had two recessions, there would be substantial risk of a needed recession with very high interest rates.

 

I look forward to a new bull market with some answers to our problems, even after that experience. Our families will need one.

 

Please comment.

 

 

 

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

https://mikelipper.blogspot.com/2022/07/weather-market-economic-and-political.html

 

https://mikelipper.blogspot.com/2022/07/beware-of-cheap-seek-fair-slowly-weekly.html

 

https://mikelipper.blogspot.com/2022/07/time-to-be-contrary-weekly-blog-741.html

 

 

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Surprises & Policies - Weekly Blog # 660

 

Mike Lipper’s Monday Morning Musings

Surprises & Policies

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

                           

                     

Surprises

One of the most curious things about most humans is that they are surprised by surprises. Perhaps it is my Marine Corps training, being a student of history, or just having a contrarian streak, but I always expect surprises. Without knowing the details, I know that I will live and operate in periods of uncertainty. Below are two lists: Elements of uncertainties and reactions.

Surprises                        Reactions

Prices (Inflation)               Ignore (As long as Possible) 

Quality (Improvements?)          Go with the flow 

People (Unexpected behavior)     Resist

Taxes (Words worse than rates)   Attempt to escape

Current Surprises

My friend Byron Wein publishes a list of forthcoming surprises each year. Below are three surprises that are already known but not being considered by most investors and their advisors. Thus, their lack of reaction is the real surprise.

Rising Prices (Inflation)

For several weeks I have been noting the almost parabolic price increase in the JOC-ECRI Industrial Price Index. This week it reached +23.80% compared to a year ago. This phenomenon is supported by the mid December price of coiled sheet steel, which was $900/ton compared to $700/ton in mid-November. The price of Aluminum is nearing its two-year high. (With Coke Cola cutting the number of brands it sells in half, they are likely to try to pass on the increased costs of aluminum cans to consumers. An example of inflation at the supermarket level) In Asia there is a major shortage of shipping containers for exports. (I assume that means the rental price of shipping containers is up significantly.)

Many top-down thinkers in Washington and in the securities markets believe that central governments and their agencies can control their economies, exemplified by the following 2017 quote:

“Would I say there will never, ever be another financial crisis? Probably that would be going too far. But I do think we’re much safer, and I hope that it will not be in our lifetimes, and I don’t believe it will be” 

This was said by Janet Yellen and I believe it was part of her effort to be reappointed Chair of the Federal Reserve. Let’s hope in her new post she has learned to have more respect for forces she does not control.

The third surprise is the not much discussed probable immunity to COVID-19 after receiving the vaccine. Because of the newness of our collective experiences, the most learned of medical experts say there may be a 5-7 month immunity. Let us hope they are being conservative; however, even doubling the initial estimate suggests a very different world than most are expecting.

I am not suggesting I can make intelligent guesses as to how these three surprises will work out, but I am noting that these along with other uncertainties need to be considered in making day-to-day investment and other decisions.

Where Are We?

Far too many military and business battles were lost when one of the combatants used out of date positioning. As I cannot avoid being a global consumer and investor, I must look at both the US and other markets for our clients. Because we invest in mutual funds for our clients, we pay a great deal of attention to their results. Again, somewhat surprising is that various market pundits seem to be unaware of two current relationships.

Each week I review fund performance for numerous periods, including the 1, 4, 13, 52-week and year-to-date period results, which are compared with various equity asset allocations. While the average S&P 500 index fund has produced positive results in each of those time periods, they have underperformed the average US Diversified Equity fund, the average Sector Equity fund, and the average World Equity fund. (This has not been the case for longer periods.)

What has caused this change? The data gives us a clue. The popular way to display results is asset weighted. We also review performance averages that are not asset weighted and include the median fund’s performance. What we discovered for large-cap, medium-cap, and small-caps is that larger funds are doing better than their peers in almost every period. Why is that? Larger funds tend to have lower costs and often have more aggressive portfolios. Advisors and salespeople find that performance momentum makes an easier sale than a belief in different leadership over the next market period, which is less risky due to current performance leaders often being more volatile.

Another example of it being beneficial to pay attention to size is in commodities. The number of contracts by large speculators, commercial hedgers, and small traders are tabulated each week and large speculators are often successful. In the latest week, the aggregate large speculator reduced very large long holdings, except for positions in gold, silver, T bonds, and the Yen. This seems to indicate that speculators are betting on non-currency related inflation. A few portfolio managers, while bullish on their stock portfolios for 2021, believe there could be as much as a 10% drop in their stock portfolios in the first part of the year. (This may be related to concerns over the new administration having difficulty getting their program started.)

US vs. the Rest of the World

Our economy and stock market structure are different than the Rest-Of-The World (ROW). The following tables highlight key differences:

        GDP % of World Trade      Market Cap % of World

China            19%                        9%

US               16%                       44%

ROW              51%                       30%

                           S&P 500     MSCI World

Information Technology        26%          21%

Financials                    10%          13%

The Wisdom of Charlie Munger

One of the highlights of Berkshire Hathaway’s (*) annual meeting are the brilliantly phrased but somewhat laconic comments to questions that Warren Buffett spends too much time discussing. Charlie, a student at Caltech while he was in the Army Air Force during WWII, sat for a zoom interview for Caltech Associates. The following is my edited review of his 22 comments. (I will be pleased to send his full comments if desired.)

(*) Position held in our private financial services fund and personal accounts.

Selectively edited comments as follows:

1. Avoid being stupid consistently rather than trying to be very intelligent.
2. Technology is a killer as well as an opportunity.
3. American companies are like biology, all individuals die as do all species, it is just a question of time.
4. I try to keep things as simple and fundamental as I can
5. A successful life requires experiencing some difficult things that go wrong.
6. We are in unchartered waters regarding the rate we are printing money.
7. “Who would have guessed a bunch of communist Chinese run by one party would have the best economic record the world has ever seen.”
8. “I don’t think Caltech can make great investors out of most people.” Great investors, like great chess players, are born to be in the game.
9. “You have to know a lot, but partly it’s temperament, deferred gratification (willingness to wait); a combination of patience and aggression. Know what you don’t know”
10. One needs to be fanatical to succeed.

Question: Which of Charlie’s statements do you agree or disagree with?    

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

https://mikelipper.blogspot.com/2020/12/searching-for-surprises-weekly-blog-659.html

https://mikelipper.blogspot.com/2020/12/an-investment-dilemma-with-possible.html

https://mikelipper.blogspot.com/2020/11/mike-lippers-monday-morning-musings_29.html

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Inducing a Recession, Opportunities?

Reading the general and financial media, be it print or on a screen, most of us see disappointment. In part because of our disappointments with political leaders around the world, we are taking away their firepower by inducing a recession. We are disappointed with the various politicians for their reluctance to solve the growing gulf between what we want to receive as a society, and what we are willing to pay for in the way of taxes and fees. Since political leaders wish to get elected, they are reluctant to force the narrowing of this gap.

As political leaders like spending as much as getting elected, we are pressing them to cut expenses, mostly by cutting the other person’s entitlements or benefits. This less spending without an offsetting increase in the private sector will shrink the size of the global economy. Since the expected general level of demand will be reduced thus creating a recession, many are already cutting back on expenditures and have a pessimistic attitude toward investment obligations to themselves and others.

Two extreme behaviors

The first extreme behavior assumes the worst is compounded into tragic levels. Since politicians won’t lead, in this scenario we will see the equivalent of the “Man on Horseback” taking charge and forcing a solution, usually by attacking one or more groups. The dastardly actions of various dictators of the 1930s who “solved” the crushing debts of their country are the source of some people’s paranoia. Following historical precedents, the group to be attacked are the wealthy people, who fear a pillaging of their assets. This fear is palpable today for some. In an investment group meeting last week, we were informed by a third generation dealer in gold bars and coins that sales of these items for personal delivery are skyrocketing. The announced intended purpose for this portable wealth is to pay bribes to cross a border. For some, this was experienced during their lives or their parents' lives in Europe and Asia. Others feel that their wealth is threatened by various left leaning governments, including the present gang in Washington. Their demand for physicals is such that new vaults specifically designed to hold gold, and to some degree silver, are being sold in London and elsewhere. Perhaps another example of this conversion of fiat currencies is that the highest priced real estate properties are selling very well.

The second extreme behavior is that some are buying in the face of plunging stock prices around the world. The buyers could well be traders who recognize, using the past metrics, that both the S&P 500 and the MSCI EAFE are oversold by a significant amount, at least as of Thursday’s close. The other possibility is that the buyers are really investors who know something. My brother points out that our grandfather, based on decades of Wall Street experience, told us that the person on the other side of a trade may know as much, if not more, than we do.

Asian Lessons

Perhaps the rumored flirtation of the Chinese for Italian debt was aborted by their analysis that the rating agencies would lower the credit rating on both the sovereign debt and two of the largest banks in Italy, which occurred last week. A more difficult factor to consider is the announcement last week that FedEx is significantly lowering its estimate of the growth in revenues of expected parcel traffic from Asia for the rest of the year. What requires more study is whether the projected drop in growth is due to an expected dip in the sales of Christmas items in the US. Historically, we have thought of Asia primarily as exporters to the US and Europe. However, our Asian portfolio managers point out that over half of Asian exports are now done within Asia. If the expected decline in the growth of air freight shipments is due to an expected weakness in the Christmas trade, that fits with the induced recession scenario. If on the other hand, the growth of consumer demand within Asia is softening, this could be much more serious. The continued growth in Asian consumer demand is critical to my long term investment philosophy, and to others as well.

What is happening in the “Real World?”

According to a survey done by JP Morgan Chase, 75% of small company CEOs are planning to add people in the coming six months. They may feel that they have a chance to fill a void left by their larger competitors who are pulling back. What appeals to me is that there is an abundance of high quality talent available, either already separated from their employers, or people who are available for the first time.

What should Investors Do Now?

We are reducing our fixed income exposure for our long term accounts who perceive that they have extended obligations to various beneficiaries. Soon the only high quality fixed income that we intend to own will have short maturities. Periodic, planned increases in equities make sense for many of our institutional and High Net Worth clients.

What are you doing with your portfolios?
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