Many Quite Different Markets are in “The Market” - Weekly Blog # 855

 

Mike Lipper’s Monday Morning Musings

 

Many Quite Different Markets are in “The Market”

 

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

Main Motivations

No one invests to lose money, even if there is a clear chance of loss due to a decline in prices, inflation, or currency values impacting spending. To reduce the odds of disappointment one can diversify, which in theory reduces the risk of a total wipe out. (Except from a large meteor or similar tragedy.)

 

As the potential number of investments is so large, most people choose to narrow the list down to a manageable number. Very few people make the choice of investing in their own work, which could produce the highest lifetime return on work.

 

For the most part, diverse investments are packaged by marketing agents to make choosing easier and generate a profit for the marketer and her/his organization. To make their job easier during their limited selling time, they wrap their sales pitches with labels. The three most popular labels in the fund world are Growth, Core, and Value. Investments are not labeled by the issuer or the marketplace where traded. Although the distribution and administration processes are significant, they are governed by economics. (If one can sell the same product many times, the marketing and administration cost per sale can be smaller than the distribution/administrative cost for selling only once.)

 

The main motivation for investors, after making money, can be summed up under two categories. Excitement & Entertainment and Generating Capital/Income for future spending. Many traders interested in the first category judge the market by following the Dow Jones Industrial Average (DJIA), along with the volatility of the Nasdaq Composite Index. Serious investors attempting to earn capital and income over extended periods focus more on the Standard & Poor’s 500 Index (S&P 500).

 

The biggest risk in owning any security is not the issuer or its traded market, but the risk created by one’s co-venturers. If a large enough number of investors panic, they can pierce a chart’s support levels and bring on more selling, which could bring on even more selling. If the stock is critical to the forward momentum of the market, the price action could end the current phase of the market.

 

Understanding Data

It is critical to understand how large-cap funds perform, because they not only have the largest earnings in the fund business, but in aggregate probably represent the largest allocation of investors’ money. (Large-Caps represent at least 80% of the general equity in stocks.) Excluding sector funds and global/international funds, large-cap funds represent 33% of assets invested in mutual funds, with growth funds accounting for $1.55 trillion, core funds $1.09 trillion and value funds $0.66 trillion. When I created fund measurement data, I found it useful to look at the totals three ways; weighted, average, and median. The resulting numbers are meaningfully different. Growth funds year-to-date to September 19th show a weighted average return of +17.79%, an average return of +14.61%, and a median return of +13.48%, for a spread of 4.31%. In the small-cap peer group the spread was only 0.54%, showing the impact of size on the results.

 

Impact of Universes

Through the end of the latest week the volume of shares traded for the year was up +12% for the NYSE and 31% for the NASDAQ. In terms of advances/declines, 69% of NYSE stocks rose while 59% rose on the NASDAQ.

 

Hunting Grounds

I was trained to look for badly performing stocks that might be big future winners. In looking at poorly performing fund sectors two sectors caught my attention, China Region and Dedicated Shorts. Both have produced five-years of loses.

 

It has also been useful to reduce commitments when a sector is changing its source of new capital. Private Equity funds are now growing in popularity with the retail crowd of advisors and their customers.

 

Conclusions:

Be careful, many investments are likely much closer to their next five-year’s highs than their five-year lows.

 

 

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Change Expected - Weekly Blog # 806

 

Mike Lipper’s Monday Morning Musings

Change Expected

 

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

 

 

 

Unusual Items

• !200 CEOs give up their positions.
• Disappointing sales for LVMH among most of their 75 labels. High-end retail sales below expected results in almost all geographies, the most damaging being China and the US.
• Average ACT scores in the US are the lowest in 30 years, with Math scores of 19.5 out of a possible 36.
• Expect liquidity pool to shrink as consumers use up government cash. Will likely lead to market volatility.
• NASDAQ declines for the week, with 61% of prices down versus 50% for the NYSE. The NASDAQ has been the performance leader for some time.
• China is producing 49% of global shipbuilding and has 68% of ship orders. Some are high value and some high tech.

 

Most Logical Changes Expected

For some time, the mutual fund performance rank order has not varied much. Using the latest week through Wednesday and 5-year performance. Ranked by 5-year performance:

                    ---Performance---

                    Latest

                     Week      5-Year

Large-Cap Growth    +2.75%    +11.67%

Multi-Cap Growth    +2.40%     +9.19%

Medium-Cap Growth   +1.52%     +7.30%

Small-Cap Growth    +0.15%     +5.11%

 

International       +2.28%     +3.57%

Global              +2.00%     +2.62%                                                                                                                                                                                            

Point of View

Believing that we live in an irregular, cyclical world, I expect the domestic rank order to be reversed in some future market period. One reason is the current effort of the FTC to reduce M&A activity of large companies acquiring smaller companies in horizontal deals, which I expect to fail. I anticipate an increase in M&A activity in the financial services sector, which includes banks, fund management companies, investment advisers, and fintech operations. Highly effective salespeople will be greatly valued, as will critical tech people. There will be cross-border and cross-industry mergers.

                  

 

 

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Mike Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805

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Equity Markets Speak Differently - Weekly Blog # 777

 

Mike Lipper’s Monday Morning Musings

Equity Markets Speak Differently

What are the Bulls & Bears Saying?

 

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

  

 

 

Prospects

All markets are in conflict between the different outlooks of buyers and sellers. They both tend to agree that stock markets will be a lot higher in the future, disagreeing only as to when, by how much, and the cause of a large advance.

 

One way to look at the conflict is to relabel the combatants as believers and historians. The believers have confidence in the factors they believe in, that have sufficient power to soon generate a substantial rise. In the current contest they lean toward a continuation of Democratic leadership.

 

The other camp agrees in the reasons to believe. They however base their view on a reading of economic and market history. Believing that the long list of current problems will be sufficiently attended to and will become better at some point.

 

The Numbers Trap

Humans have long figured out that there are seasons that change with some regularity and in a somewhat predictable rotational order. The ancients tried to time the change in seasons by inventing reasons for the changes, although most of the proclaimed reasons for the changes did not hold up. People eventually gave up trying to identify the causes and instead focused on the timing of the rotation.

 

Attempting to time the rotation relied largely on the periodicity of the changes. They tried to attach predictability to such events, like which members of long forgotten football leagues won the Super Bowl, or the term of US President. As someone who has studied both rotations, I have found that most of the time the results did have better than normal predictive value, but not perfect.

 

I spent many years consulting with the National Football League and the NFL Players Association on the selection of managers for their defined contribution retirement program. I paid attention to who won the Super Bowl each year, hoping the winner’s superior management skills would indicate which team had the best investment skills. I found that there was no consistent connection. Looking at this year’s results it seems the losing team had better results play by play, but the winner had a handful of winning or perhaps lucky plays in the last part of the game. Nevertheless, when asked which was a better team on game day, I felt the losing team was better.

 

Some market analysts have confidence in the “Presidential Cycle”, which is based on the four-year term of the US President. It assumes reelection to a second term is likely to continue the programs of the existing president. I believe this is not necessarily the case. Often in a second term the President is a lame duck, with less willingness or ability to help the party’s congressional election candidates. Some say the second term is an attempt to burnish the reputation of the office holder, a stark contrast to the motivation of the first term. With the recent split in party control of the House, executive orders have replaced difficult party line legislative actions. In this case there is a role for the judiciary, the third part of government, to impact the result. I think that is true this year.

 

If during any five-year period there is a meaningful change in corporate leadership, it can impact not only what legislation passes, but which legislation is carried out. Any change of leadership can impact what happens in the second and third years of a Presidential term. 

 

I suggest investors focus on the market, economy, and shifting political conditions to assist in guessing future stock market direction, not unrelated inputs.

 

Liquidity Drives Size Selection

Each week I examine the performance of equity funds, in part by the average size of the companies in their portfolios. In a week like last week, large-cap funds declined less than mid-caps and small-caps. Historically, the order of price movement is the complete opposite of their ability to generate earnings per share in the companies they own. 

 

I suspect there are two reasons for this. First, larger market-cap stocks have more liquidity than smaller-cap stocks, in part due to the NYSE change in attitude. In the market crash of 1987 market indices declined 25% in one day. At least one specialist firm continued to make orderly markets. That is, they kept the bid and asked spreads in their normal range by committing their own capital and debt on the buy side to offer liquidity to the market. By the end of the day “they went to the wall”. In other words, they were effectively bankrupt and had to close. (The next day there was a rally that returned profitability to the specialist book.)

 

Neither the exchange, nor the community, bailed them out. From that point on the center of trading liquidity deserted the floor. The remaining liquidity was to be found at the trading desks upstairs, which did not have the obligation to maintain orderly and tight markets. As investors we have all suffered from this withdrawal of floor liquidity.

 

The second force that hurt smaller company markets was more difficult to track and is even larger and more difficult to track today. The normal, faster moving earnings progress of smaller companies attracts M&A activity from larger companies and competitors, who hope to capture earnings and/or products/services growth absent in their companies. Note how few IPOs and acquisitions we have seen recently. (Part of this may be due to private equity funds delaying new investments until their valuations have recovered, based on higher comparative prices for their own expected sales.)

 

Working Conclusions

For those who are still believers, you need to learn how to take advantage of stressed markets. Those that are historically oriented need to be ready to pounce quickly in periodic bear market rallies.

 

Thoughts are appreciated.

 

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An Informative Week with Many Questions - Weekly Blog # 759

Mike Lipper’s Monday Morning Musings

An Informative Week with Many Questions

 

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

                   

 

 

CPI Thursday Morning Pivot or Rotation? 

The readings for the Consumer Price Index and its components were announced before the market opened on Thursday. They were not as high as many expected and market participants treated the less bad news as good news. Many chose to believe the less bad news would embolden the Fed to reduce the size of expected interest rate increases. In effect, the Fed was expected to “pivot”, messaging the market that inflationary increases would be reduced. Their enthusiastic response to the gap opening of the market was not narrowed on either Thursday or Friday.  

 

Market analysts believe that price gaps must be closed before the market can move in the direction of the gap. Most of the time this is the case, but not always. It may take a while. 

 

Market pivots tend to be infrequent, and partially reversed quickly. They can have limited long-term predicative value. However, they can be an early identifier of a meaningful rotation. In this case, the odds seem to favor this pivot not being a significant rotational change. My thinking is based on two inputs. 

 

1.  The mid-term election was largely motivated by a vote against the other side’s leaders and not by a vote in favor of positive growth strategies. Both parties have leadership problems. The Democrats have no fresh leadership with a significant following. The Republicans in some cases did not field attractive candidates and did not match the opposition’s operational talents. With the House of Representatives in the hands of the Republicans, I expect little in the way of new legislation. Many of the expected Executive Orders will also wind up in court. Stagflation will likely be the result. 

2.  Transactional volume will likely be less than expected in a normal bull market. Numerous brokerage firms, investment advisers, and investment bankers, are cutting back on lower producers or those too well compensated.

 

T. Rowe Price Lessons for Investors 

(The following discussion should not be interpreted as a recommendation. T. Rowe is an old personal holding. I have known its CEOs going back to Mr. Price. The firm is investing its capital on broadening its domestic and international marketing and is also developing new distribution channels. Doing so will take time and money to reach the firm’s desired profitability levels. A topic I can address off-line.)

 

T. Rowe Numbers for the Week ended November 11th

• Opened $103.71, closed $133.34 
• Monday-Wednesday share volume in millions of shares:  1.74, 1.85, 1.86 
• Thursday and Friday share volume: 4.49, 5.55 
• Weekly Price Gains: DJ Asset Managers Average +13.92%, T. Rowe +28.57% 
• Institutional Ownership 77.12 % 
• Top 4 shareholders own 26.62 % 
• Thursday’s gap of 5.48% not closed on Friday 

 

While the company is listed on the NYSE, it is essentially an institutional stock owned in some respect by competitors. The size of the price gap and above average gain demonstrates the lack of liquidity on the upside. I don’t know what the liquidity and potential price gap will be on the downside.  

 

Another hint of the professional market dominating the NASDAQ marketplace were the weekly declines as percentage of shares traded: 21.16% for the NYSE vs. 32.85% for the NASDAQ. 

 

Other Thoughts of the Week 

• The IMF believes 1/3 of the world is in recession 
• 7 out of 10 large battery producers are in China 
• With the 2-year and 30-year US Treasury yields at 4.32% and 4.08% respectively, it suggests the minimum expected return on high grade paper will be required for a long time by investors. Could it also mean that this is the maximum safe distribution from high quality accounts in order to preserve principal? 

 

Should real estate investing be divided between current income production and the conversion profits from changing the nature of the property? 

 

Historically, roughly half of small businesses fail within five years. Isn’t it likely this will increase during a period of stagflation? Small company investing has traditionally produced higher returns when large companies are having problems during a stagnant period. However, there will also be offsetting small-cap losses during the period. 

 

What are Your Thoughts? 

 

 

 

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A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.