Watch Out for the Four - Weekly Blog # 938

 

 

Mike Lipper’s Monday Morning Musings

 

Watch Out for the Four

 

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

 

          

 

Preface

As subscribers have been told, I am shifting my focus to investing for long-term gains, hopefully for multiple generations. This is the time to begin searching for future winners, although it’s not the time to begin serious buying. If you are like me, at times it can be difficult to only follow an investment intellectually. I need to own a small amount so that I go through all the relevant info while awaiting the time to begin a meaningful buy program.

 

Timing May Not Begin Until:

The beginning of the buy program will not start until people and the data change. In terms of people, there are four structural leaders. These are the men who wish to change the future and are governing to do that. They lead and largely dictate activities in the US, China, Russia, and North Korea. Only the last one, North Korea, is preparing to eventually pass the torch of control to a very young daughter. In each case the eventual leader will be different than the present leader and will have to exert power to stay in place. Any of these replacements could have input into future global investments. Because of the similar ages of the first three, investors will be faced with cross currents that will make choosing investment policy difficult.

 

Before these leadership transitions occur, the global economy is likely to change multiple times. I expect we will be dealing with the terrible “4s”* at least some of the time. The data series likely to experience major swings are inflation, currencies, and taxes, among others. Changes to these data series may not be dictated from on high, but in the marketplace. Additionally, secular changes in demographics and technology will have an impact on how people act and feel.

*Terrible 4s are 4% for inflation, unemployment, and dollar decline, leading to an S&P 500 price that starts with a “4”. A high 4 signals a recession and a low 4 a depression.

 

What Can We Do Now?

First, we can pay attention to what people are doing, not saying. Actions speak louder than words. While the media is full of pundits talking about market indices at new highs, 58% of the stocks on the New York Stock Exchange (NYSE) fell in the latest week. Perhaps more meaningful, 56% of the stocks fell on the NASDAQ. A survey of investment advisers and their clients found advisers twice as bullish as their customers.

 

Second, be aware of financial and economic history. We know that historic patterns don’t exactly repeat, but directionally they are pretty accurate. Economic cycles are based in part on the level of debt being created throughout the system. (Government deficits need to be considered as well as business debt, personal debt, and accidental debt.)

 

When debt repayment becomes too burdensome it won’t be promptly repaid and will cause purchasing power to drop and fixed income/equity markets to decline. Depending on the severity of the decline it will be called a recession or a depression. The frequency of recessions is normally five to ten years, suggesting one is due. A depression is much more serious and infrequent, usually every fifty to one hundred years. Depressions are often caused by mismanagement of an economy in a recession. We have not had a depression for ninety years and some believe the last one brought on WWII. The key for us is knowing that these occurrences are possible and being aware and ready to change behavior.

 

While Waiting

The present should be devoted to looking for stocks to buy for the next expansion. A study of the past suggests the leaders of the next cycle will be quite different than the present. Bearing in mind that many children born today will need retirement money 100 years from now, the odds of most large companies surviving is not good.

 

There are lots of ways to choose stocks to research. None of them are perfect and they will change over time, so investors should always be learning what will cause change. From time to time, I’ll pick one approach to explore briefly, so keep tuned to find an approach that helps you.

 

Acquisitions

No solution is perfect, and conditions change unpredictably. It is normal to change our choices after looking at the cards we are given. The easiest approach is to add a new holding and temporarily retire a present holding. Additionally, no one plays the investment game without making periodic acquisitions. Unfortunately, many investors fail to discard some part of what is not working. This habit of adding without discarding leads to an ever-increasing number of acquisitions, which in most cases leads to average and eventually below average results.

 

I have never seen an acquirer who couldn’t benefit from getting more talent, often with different characteristics than their existing talent. I have often found it better to buy a company for management and tax purposes, even if it’s for a single individual. It has worked for me, even when it was a bad choice. It is easier for me to make a bad choice than to fire an individual or a small group who I like as people, but not as workers and co-venturers. I am comfortable with the way Apple often buys tiny companies, compared to others who acquire much larger companies with all sorts of personnel problems.

 

I was speaking with the manager of a small unit in a very large company who wanted the unit to grow by hiring more people doing the same thing his present employees do. That may be efficient in terms of output, but it just adds to existing problems. I would not view this situation as growth but view it as adding new machines. If on the other hand the new people brought new talents, they could serve a different group of clients who had different needs, which is real growth.

 

There are some companies who try to grow by buying distant operations, adding resources outside their prime geographical area. I do not view this as growth of talent either, but as getting more copies of existing machines. They would be adding to present capacity but not getting new talents that could open new markets. For me they are not growth engines but merely machine acquirers, which will not be valuable talents as the business changes. Investors can see which type of stock I would acquire, even at somewhat of a premium price.

 

Question: What do you think about my approach?  

                                        

 

 

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Mike Lipper's Blog: Investors’ Interlude - Weekly Blog # 937

Mike Lipper's Blog: Not Yet Ready for a long-term Solution - Weekly Blog # 936

Mike Lipper's Blog: We Have a Management Problem - Weekly Blog # 935

 

 

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Investors’ Interlude - Weekly Blog # 937

 

 

 

Mike Lipper’s Monday Morning Musings

 

Investors’ Interlude

 

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

 

 

 

Take Some Gains Before Taxes Do

The common denominator for most big investment gains are changes. Usually changes in investor perceptions and economic structural changes. The Standard & Poor’s 500 (S&P 500) and NASDAQ Composite are at record highs, due largely to enthusiasm for announcements related to the suspension of fighting in the Middle East. (This is not true for the Dow Jones Industrial Average (DJIA) and the average stock.  Unfortunately, since WWII the US has had a history of winning wars but losing the peace.)

 

We do not know the total cost of the war and other spending, including election-oriented payments. I suspect the President’s desire for a lower valued dollar will be achieved. There is also a strong push from urban legislators for “fair taxes”, also known as “tax the rich”. Thus, I believe capital gains rates and estate tax rates will rise.

 

Due to these expected changes long-term investors should review their portfolios to see how much of their wealth should be realized before their estates are taxed. If this generates significant amounts of cash, I suggest maintaining the cash or short-term treasury holdings for reinvestment.

 

I believe there will be positive changes in the foreseeable future. These changes may be driven by technology, demographics, immigration, and global factors. These changes are likely to be net larger than politically motivated changes and you want to be in position to take advantage of them.

 

Investment Impacts of Past Changes

The Founding Fathers were afraid of the powers of government, so they placed our Capitol in the humid swamp of Washington DC, thinking our legislators would desert the “swamp” during the humid months. That worked reasonably well until the development of air conditioning. The end of the government’s year is now September 30th, after the summer political conventions, which reduces the time for debating many of the critical issues of the day. DC is now a year-round city for government workers and legislators. Many work or live in large buildings constructed and possibly owned by real estate families who are probably wealthier than the US Senate members. Thus, the advent of air conditioning changed how our government works.

 

Another unexpected change was the railroad growth of the late nineteenth century. The highly regulated railroads only made profits on freight travel and lost so much money on human passengers that the federal government became the principal owner of passenger travel. The freight lines are governed by both the Department of the Interior and Anti-Trust laws. This has led to other countries having better and cheaper train service than we do, paid for by charges on the goods we consume. It is interesting to note that the Dow Jones Transportation Index, which covers the rails, was the best performing market index this past week. The rails are still important.

 

Future Changes

We live in an environment of an increasing rate of change. I leave to others to identify the changes which most investors would not be surprised by.

 

Geographic Changes

1. Western Hemisphere countries have become more partners than adversaries in terms of trade, health practice, external and internal defense, probably led by Canada.
2. Russia, after Putin, will experience major political and economic changes.
3. Asian countries that border both Russia and China will come into their own in terms of trade and be more open to development.
4. African countries will welcome joint development from Western countries.
5. Indonesia and India will become less autocratic, with foreign companies able to generate substantial sales and earnings.
6. Each country will make their own rules.

 

Retirement Issues

1. Over time, US Social Security will be allowed to exclude US government paper and possibly approach being a foreign wealth fund.
2. It is reasonable to expect that those born recently will live to at least one hundred, so we will need to provide for longer periods of investment and spending.
3. For the same reason, private retirement vehicles will need to change.

 

Market Regulation

1. Using the last trade may no longer be appropriate if it is too small and unrepresentative of the size of the seller.
2. As more stocks and possibly bonds trade in size in after-hours, having a closing price on the exchange market may be unrealistic.
3. From a technology perspective, there should be a body that can approve of their use for retirement accounts.
4. Should issuers of a certain size be required to have assets or insurance on the life of the CEO that can be used in retirement accounts.

 

As usual, I would love our subscribers to share their views with me. 

                                        

 

 

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

Mike Lipper's Blog: Not Yet Ready for a long-term Solution - Weekly Blog # 936

Mike Lipper's Blog: We Have a Management Problem - Weekly Blog # 935

Mike Lipper's Blog: Is History Rhyming Again? - Weekly Blog # 934

 

 

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Diversification - Weekly Blog # 929

 

         

 

Mike Lipper’s Monday Morning Musings

 

Diversification

 

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

 

                                                                        

 

Preface

On a recent trip to London, Ruth and I attended a private fund and friend raising concert for the Academy of St. Martin’s in the Fields (ASMF), where Ruth is the first American trustee. The wonderful music was performed by Joshua Bell, the artistic director, and five other top-notch string musicians from the ASMF. Between the six talented musicians they played three different types of string instruments, alternating between lead and ensemble roles. The result was a successful combination of each of their talents.

 

Even when listening to a magnificent concert performance, I cannot forget my investment responsibilities. As individual musicians alternated from leading to supporting roles, it reminded me of what individual securities should do in a diversified long-term investment portfolio.

 

Application to Portfolio Management

In 1940 the SEC completed their depression-oriented reform rules. Among the last of these was the Investment Company Act of 1940, which unlike the other six regulations was not formed at their SEC headquarters. It was produced at the Mayflower Hotel in Washington by lawyers for the fund industry from Boston, New York (where the industry’s trade association was headquartered), Philadelphia, and Washington. Considering their recent experience of the market falling during the Depression, the mood of the meeting was to try reduce the chance of big future declines. The best model for that were state laws governing trust accounts, using generations of work by Boston and Philadelphia lawyers. (Even as late as the early 1960s a few Boston law firms had professional securities analysts on staff to assist in managing trust accounts.) Note, the main concern of the creators of fund regulation was the avoidance of losses. No word was spoken of making money on investments.

 

They thought the best way to reduce the chance of major losses was to limit an account’s exposure to any single investment. This led to limiting the percentage amount that funds could invest in any one stock, which usually meant no more than 5% of the voting stock at cost (not market). To this very day, most equity funds are labeled as diversified if they adhere to this principal.

 

The Problem with Voting Stock Limits

The biggest penalty paid by investors is not losses, but the absence of profits. Mutual Funds with long histories often make ten, twenty, or even more times as much on some of their holdings, which more than covers a small number of losses. Furthermore, great fortunes have been made, particularly over successive generations, in single stock portfolios or portfolios having a small number of investments.

 

For Professional Investors

The concept of risk management is critical but doing it by name or percentage of voting shares does not reduce risk, it may increase if all investments are exposed to a single concept. In the late nineteenth century professional investors considered concentration to be the best and safest way to invest. My college degree is from Columbia University, which had an endowment fully invested in railroad bonds and stocks, every single one file for bankruptcy. Today there is a risk that some participants in the “AI” surge could produce similar results by investing in too much in a good thing.

 

For publicly traded securities I suggest the biggest risks is with the stock owner and not the issuer, as they will be sellers of the stock before you do. Other risks include countries, technology, politics, and management. These can be identified as short-term and long-term factors. A possible short-term indicator is slightly more participants being bearish than bullish in the latest American Association of Individual Investors (AAII) survey of expectations for the next six months. Interestingly, the long-term indicator was Friday’s announcement by the Supreme Court, which ruled against the President’s authority to set tariffs using the International Emergency Economic Powers Act (IEEPA), which had very little to any impact on the market.

 

Bottom line, watch the musicians play and how well they work together, both with other musicians and staff, but also watch the reaction of the audience.

 

Understanding Going Global

In a recent conversation with a London-based fund manager, who in the past was almost completely invested in the US but now has a growing position in European stocks. While he has the biggest portion of his portfolio in US securities, he is very risk aware and expresses this by augmenting his portfolio with European stocks. Normally, he expects his US positions to outperform his European positions, but not in a declining market. In terms of P/E, Free Cash Flow, Dividend Yield, and other value measures, European stocks are less risky than US holdings.

 

 Another careful investor was Charlie Munger, who listed six principles to be avoided: High Financial Leverage, High Operating Leverage, Negative Cashflow, Poor Governance, High Risk of Obsolescence, No Competitive Advantage vs. a Strong Competitor.

 

Share your thoughts

                

 

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Mike Lipper's Blog: To Win Long-Term, Learn From Great Presidents - Weekly Blog # 928

Mike Lipper's Blog: Strategically, Time to Think Differently - Weekly Blog # 927

Mike Lipper's Blog: Do Current Prices Lead Future Markets? - Weekly Blog # 926

 

 

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Biggest Investment Hurdle: Complexity - Weekly Blog # 913

 

 

 

Mike Lipper’s Monday Morning Musings

 

Biggest Investment Hurdle: Complexity

 

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

 

 

 

 

First Priority

An investment priority should be logging changes to your investment policies, although most investors do not maintain such records. To paraphrase the late and great Charlie Munger said that Warren Buffett was a learning machine. His point was, Warren benefited from the losses he sustained. He had an investment history of making very few repeated mistakes.

 

Most profitable investors also make relatively few mistakes, in part due to most mistakes forfeiting more opportunities than money. To avoid future mistakes, it would be helpful to have an insightful roster of mistakes. The real painful mistakes are repeaters.

 

Tools of Repeating Errors

Many repeating errors of judgement rely on an automatic mathematical response. For example, if “x” happens then do “y”. This is a non-thinking action. It does not adjust for changes in critical conditions that might impact the current situation.

 

On a very basic level, buying is different than selling. Investment buying is often based on market prices being wrong but are likely to change soon. The seller on the other hand believes in the relative attractiveness of a security that will shortly decline in price. In both cases the investor believes that he/she is ahead of the bulk of the investment market. These are the actions of someone who wants to be among the leaders.  This is in direct conflict with successful investors who prefer to be lonely and contrary to the crowd.

 

Understanding Complexity

Berkshire Hathaway (*) developed a system of categorizing new investment information into three buckets, “yes, no, too hard”. Berkshire’s advantage was structured on the combined experience of the late Mr. Munger and Mr. Buffett. This experience included knowledge of over 60 different companies they owned and the knowledge of various securities they previously owned or looked at for more than 100 years combined. Where most others saw complexity, they saw investment opportunity.

(* Berkshire Hathaway shares are owned in client and personal accounts.)

 

Can’t Avoid Complexity

In the modern global world, one cannot avoid complexity. However, with some hard work and experience you can reorder many elements into positives, negatives, and judgements to be determined. With this structure one can put odds on each critical item, leading to a preponderance of positives or negatives worthy of action.

 

An example of factors that surfaced this week in the media are shown below:

• Wall Street Journal Headline “Foreign Stocks outperform S&P…”. This could cause many US accounts to add foreign stocks and funds. However, the largest collection of stocks that Americans buy are multinational stocks listed overseas. In many cases the largest portion of these portfolios are invested in US operations, which is a negative if your purpose is to participate in European and Asian growth. (The same could be said about US listed multinationals with significant sales abroad. This includes Coca Cola, a large holding of Berkshire. The same could be said about Apple.)
• The Federal Reserve is concerned about a bifurcated economy consisting of technology and older companies. Both sides have significant foreign sales.
• This may be the wrong time for the proposed cut in bank supervision. Both banks and non-bank financials are increasing loans to lower-quality companies.
• While some believe oil is being priced attractively, natural gas prices are even more attractive. Also, Copper has historically performed better than gold.
• The “Buffett Premium” is disappearing just as insurance driven earnings are very strong.
• Cash in portfolios should be used in the short term, either as a basket to buy favored stocks or to reduce exposure to over-capitalized companies and increase return on equity.
• In latest week there were more declining stocks than rising stocks.

 

Each of the mentioned items could be attractive buy or sell opportunities, depending on one’s view.

 

What do you think?

 

 

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Mike Lipper's Blog: Signals of Change in Historic Patterns - Weekly Blog # 912

Mike Lipper's Blog: Where Are US Stock Prices Going? - Weekly Blog # 911

Mike Lipper's Blog: A Good Time to Sell? - Weekly Blog # 910

 

 

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A Good Time to Sell? - Weekly Blog # 910

 

 

 

Mike Lipper’s Monday Morning Musings

 

A Good Time to Sell?

 

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

 

 Selling is More Important

When an investor, distinct from a trader, asks me if they should sell some portion or all of their holdings, I first try to determine the critical time period in judging the results of the action. If one is persuaded by media voices the answer will usually be tomorrow or at the end of the calendar year. For me, it is when the money is expected to be needed. For example, for my newborn great grandchildren's retirement or the replacement of the new university dorm, it could be a 100-years. Another matrix could be the future low price point needed to protect future funding of a desired goal.

 

Regarding a future low price point, it is important to recognize that prices move in cycles. The important cycles can be labeled as seasonal, cyclical, secular, and structural. It is how I think of the latter part of last week’s drop in prices, where what I follow fell -15% to gains of +7%. To conserve your time and the blog's space I will comment on the year-to-date period for those impressed with media voices and include some other screens as well.

 

The first thing that hit me was the largest average gain of +15.94% in non-leveraged, diversified large growth mutual funds. These gains were driven by the biggest positions in technology stocks. However, they missed out by focusing on securities registered with the Securities Exchange Commission. After many years of SEC registered stocks performing very well, there were some foreign markets that generated much better performance multiples. The leading countries were Ghana +130.25%, Cyprus +94.75%, Luxembourg +74.8%, Greece +71.45%, Columbia +70.05%, Nigeria +65.1%, Korea +61.1%, South Africa +48.02%, China +32.85% and Chile +31.02%. Weekly Barron's performance charts showing 14 European and 7 Asian countries had 7 Asian and 4 European indices gaining. (As an analyst that has followed non-US stocks and invested in some, I believe this is a good time to examine these opportunities.)

 

Most Analysts Focus on Rising Stocks

I glanced at those stock prices not doing so well. For example, the Dow Jones Industrials (DJIA) and Dow Jones Transportation (DJTA) stocks fell -2.739 and -4.88% respectively for the week. Perhaps more importantly, their year-to-date performance results were +6.90% and -5.21% respectively. (This suggests the US goods economy is not doing well. Tariffs could be a problem. Freight movement is down for both the rail and truck business and may forecast Halloween and Christmas sales being behind earlier expectations.)

 

Down Prices = Opportunities

Three industry sectors are showing small declines on a year-to-date basis: Banks -4.26%, Insurance -1.64% and small companies -1.1%. Restrictions on all companies are the same, but small companies may be impacted more due to their staff size. To the extent the current administration reduces some of the regulatory overhead, it cou1d restore a competitive advantage to smaller companies. However, many restrictions on smaller financial and insurance companies appear to make it easier for new entrants.

 

AI, An Unrecognized National Problem

Some are beginning to comment on the absence of large profits from Artificial Intelligence companies due to lack of public discovery of relevant financial disclosure, so I will not. At a recent meeting hosted by the London Stock Exchange Group, one of their headline speakers noted that the challenge for the AI industry was to produce "more with less". It is well recognized that AI is taking over an unidentified number of job functions, reducing the need for human labor. Great! Where are these laid off people going to get jobs anywhere near similar wages? This could be a concern for future Administrations. 

 

The 4th Activist President

Just like Andrew Jackson and the two Roosevelts, President Trump is trying to solve various national problems by changing how they are handled. Some of these attempts will survive the Courts. What I am not seeing is how the restructuring of the economy will work. Looking at the aftereffects of prior activist Presidents, I suspect it will materially change the outlook for investments, something people are not currently focusing on.

 

I would like to know if anyone has any thoughts on what restructuring will mean to their investment orientation.

  

 

 

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Mike Lipper's Blog: Tactical Headlines Show Strategic Clues - Weekly Blog # 908

Mike Lipper's Blog: Anticipation Pays; Deliveries May Not - Weekly Blog # 907

Mike Lipper's Blog: Selected and Casual Road Notes - Weekly Blog # 906

 

 

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Generally Good Holy Week + Future Clues - Weekly Blog # 885

 

 

 

Mike Lipper’s Monday Morning Musings

 

Generally Good Holy Week + Future Clues

 

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

 

                             

 

Holy Week

The driving celebration of the week ended Sunday was the three dominant religions being able to conduct their Services peacefully. The US stock market contributed four days of generally rising prices, although there were clues related to critical concerns.

 

First, a slightly smaller percentage of NASDAQ stocks rose in price (59%), vs. 69% on the "big board". NASDAQ prices are generally more volatile and have a more professional audience than those on the followers of only New York Stock Exchange (NYSE). NASDAQ stocks have outperformed NYSE stocks for some time and one could conclude that their participants are more clued in than NYSE followers.

 

In considering our domestic markets, we should not forget our present and future are influenced by global actions. For example, last week the older western European stocks on average did better than our domestic stocks, even though they will be impacted by various tariffs and recessions. The twin concerns, tariffs and recessions, were the main worries during the four-day market week. As a contrarian thinker I believe both concerns are not properly focused.

 

I believe President Trump is using the threats of tariffs primarily as a force to begin a much larger, more powerful, and more difficult conversations. These conversations can be lumped under the label of non-tariff trade barriers. No single law or regulation will cover all these topics. They can only be addressed by the heads of the various countries, which Trump hopes will be brought to the negotiating table or private discussion by the threats of large tariffs.

 

Trump believes there are two main areas where the US is being disadvantaged, local trade restrictions and manipulated foreign exchange rates. Additionally, he believes only the most senior people can reach an effective compromise and he is willing to adjust US tariffs and other factors to reach his objectives. If I am close to being correct there is no telling what the ultimate results will be, as all negotiations will need to be reviewed in light of competition with other countries. Thus, we need to pay attention to the various twists and turns that will take place, to the extent they are revealed, and not to jump to any conclusions.

 

The second conundrum facing us as both citizens and investors is recognizing that periodic economic declines are inevitable. The world has not repealed personality traits, the impact of technology, nor climate conditions, which will all impact our financial condition.  

 

Goldman Sachs Studies

Goldman believes the odds of a US recession are getting higher. They studied the history of recessions and were able to divide the past into cyclical and structural recessions. On average, cyclical recessions end within a year and structural recessions average twenty-seven months.

 

My Most Fearsome Concern

We have all learned that history does not repeat itself, but rhymes. Thus, as an analyst my first exercise is to look at the worst decline the US has ever experienced, the Depression. As there is almost never a single individual who causes a major economic change, it is a mistake to label the cause of the Depression under a single name.

 

The 1920s was a period of rapid expansion of debt and even looser morals. By the end of the decade, both farmers and smaller banks were heavily in debt. To bail them out congress came up with the Smoot­-Hawley tariffs. (Similar to today, politicians were counting votes, while the financial side of government was concerned about the debts of dealers who had farmers as clients, as well as local small banks. The latter was such a concern that when FDR campaigned, he promised to keep the banks open then immediately close them after coming into power. To some degree, this experience may be like today's tariffs.)

 

When FDR came in with his "brain trust" of Harvard professors, they sought to change much of how the country was to be governed. (Somewhat similar to how edicts from the Supreme Court and other judges have been used to force change.)  

 

Much of what President Trump and Elon Musk are trying to accomplish is structural. Even if they can find effective people to carry it out, it will take a while to deliver the new ways of doing things to the marketplace. On the basis of the above thinking I fear the next recession will be structural, lasting a few years. I hope I am wrong.

 

Question: What do you think?

 

 

 

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Mike Lipper's Blog: An Uneasy Week with Long Concerns - Weekly Blog # 884

Mike Lipper's Blog: Short Term Rally Expected + Long Term Odds - Weekly Blog # 883

Mike Lipper's Blog: Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

 

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Recognizing Change as it Happens - Weekly Blog # 876

 

 

 

Mike Lipper’s Monday Morning Musings

 

Recognizing Change as it Happens

 

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

 

 

 

Perspective is Difficult to Read

When gazing out a window while traveling in a car or a plane the view constantly changes, while the view within the vehicle remains constant, similar to the internal changes we experience while investing. Many of us are aware of both the outer world and our own investment perspective, although we are often unaware of the changes in people next to us. Rarely do we focus on factors impacting our own thinking during our travels.

 

Now may be a good time to review what is happening to those close to us, and even more importantly to ourselves. The following list of items crossed my consciousness this week, causing me to consider changes to our investments. In no particular order:

 

1. While I am aware of the US stock market trading volume growing, the rate of change between the 2 stock markets is telling. Over the last 12 months trading volume on the NYSE has grown +8.03%, while the NASDAQ has grown +57.39%. This indicates that there are two very separate markets. This was confirmed by Thompson Reuters’*, an old Canadian/British firm, through their actions this week. They moved their US listing to the “junior” exchange, which they identified as the home of technology companies.
2. The AAII sample survey had only 28.4% of their participants being bullish for the next 6 months, while 47.3% were bearish.
3. The Economic Cycle Research Institute (ECRI) industrial price index was up +6.44% over the past 12 months.
4. The Chinese marriage rate has dropped -20.5%.
5. JP Morgan Chase* announced layoffs for next year.
6. International Mutual Funds were the best performing group this week for the first time in a long time, led by large-cap growth funds.
7. The Financial Times is asking how big Walmart* can get.
8.  Until we actually see the final legislation and/or a court ruling, one wonders how the US will be governed. The US executive branch of government is in the courts for changes they’d like to make, after legal challenges.

I wonder how much longer the four international political leaders (Putin, Xi, Trump, and Moodi) will remain in power.

(* Owned in client or personal accounts.)

 

We are at a period in history where multiple large changes are occurring somewhat simultaneously, with significant consequences for winners and losers. Time is a scarce resource and that creates a sense of urgency among the participants. The following events bear close scrutiny as the outcome will be consequential for all.

• Change in US government – The power dynamic is being challenged in Washington DC and the courts, with a clear understanding that power could revert to the old order after the mid-term elections. So, Republicans recognize that change must be accomplished within the next two years. If the Republicans are successful, the country will likely see smaller government with some power ceded to the states. Smaller government should come with smaller costs, a plus for the national debt situation.
• Global government dynamics – Many governments around the world are grappling with similar ideological dynamics as those seen in the USA and are nervous about what might come next. This was on full display at the Munich Security Conference this week. The potential for trade wars could intensify significantly.
• Two wars have the potential to conclude this year, Gaza and Ukraine. Not all are likely to be happy with the outcome. Nor will there be unanimity among those shepherding the negotiation. Rebuilding will be costly in both locations, with no clear indication of who will pay and what deals will be struck to compensate those investing the money.
• Significant technological changes are likely in the next few years, with AI, robotics, and automation at the center of these changes. There will likely be big losers and winners, where the first mover advantage could be quite significant.
• An energy renaissance is likely, as the new technology driven future requires substantially more power than what it is replacing. The green revolution will not likely provide adequate solutions for the energy shortages. Natural gas and nuclear power seem to be the likeliest winners, as they provide the most consistent baseloads and the smallest CO2 emissions.    

Each of these bullet points has the potential to be disruptive. Having them all occur at roughly the same time will make for a challenging investment environment. While traders may be able to trade successfully, the odds favoring investing are declining for the next several years.

 

I would like to hear contrary views.

 

 

 

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Mike Lipper's Blog: A Rush to the 1930s - Weekly Blog # 875

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Mike Lipper's Blog: Roundtable Discussion - Weekly Blog # 873

 

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Roundtable Discussion - Weekly Blog # 873

 

Mike Lipper’s Monday Morning Musings

 

Roundtable Discussion

 

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

 

 

 

We at Lipper Advisory Services feel a deep duty to all of our clients and those for whom we have an investment responsibility. I’m currently taking advantage of a visit from my son Steve to collaborate and will be working with Steve and Hylton to produce this week’s blog. Most money invested in the United States and many other countries is for long-term purposes. While the media focusses on short term results, we tend to look long-term and only use short-term inputs if it helps in making long-term decisions.

One of the critical determinants of investment results is the size and nature of the population. Recently, the Congressional Budget Office issued a long-term forecast on the size of the population that was lower than prior forecasts. This is very important but it is only one of several critical forces that will produce results. One of my concerns is that most populations will shrink and only a few countries will enjoy future population growth. The real force that will drive investment results will be the thinking of not only investment professionals but also of investors. 

In this light I am personally very concerned that most educational systems operating in the world are producing poor results in terms of preparing people to produce adequate lifetime savings. These issues start from pre-K through PhD education. This issue is especially important because most people generate the bulk of their savings through their work efforts.

    

I think that there will be some tremendous investment opportunities over the next ten years but wonder how the median member of the population will do. My concern is that few will be prepared with the necessary thinking, savings and discipline to identify and take advantage of these opportunities.

 

My path as an investor

To the extent that I have done reasonably well as an investor, it’s because I have stayed within a zone that I understand reasonably well. Warren Buffet calls this a “circle of competence”. I tend to focus on areas that other people are not focused on. However, there’s a challenge in that most of the areas not being followed actively are currently unattractive investment opportunities. An investor needs to bring something else to identify real opportunities. They need some in-depth understanding of the reality of the underlying business. That being said, it’s possible some opportunities will be in securities markets and countries I have not had direct experience with.  

 

I hope that Hylton and Steve will share what they are thinking about concerning these issues. It will be a source of future guidance. 

 

 

Steven Lipper

I agree that both demographics and education are important factors for long term investors to consider. My father has trained me well as a contrarian thinker. I think demographics running in the opposite direction of the typical view is an important issue for equity investors. It’s inarguable that a country’s long term economic grow is tied to its population growth (more precisely, to total hours worked, but that’s another topic). 

 

But as equity investors we are not buying future economic growth we are buying future profit growth.  There’s a counter-intuitive dynamic I’ve seen as a small company investor. When there’s a shortage of labor business owners invest more in productivity enhancing processes and equipment. They are forced to do this in order to meet rising orders with a flat employment base. And that increased productivity often increases profits, stocks prices, and workers income. So, as an equity investor I am not pessimistic about the lower projected growth rate of many countries’ populations. Differences in results will come from how countries incentivize investment. 

 

With regard to education there’s much to say but let me focus on the investment implications and opportunities resulting from disappointments in our education system. I expect that for most people post-secondary “education” will evolve to having a greater focus on certification. By certification I mean learnable skills which are in demand by employers and can be verified through testing. These certifications, if awarded by respected organizations, are valuable signals that employers can use to reduce risk in the hiring process. 

 

Certifications also benefit from the dynamism of market forces as in-demand skills will translate to in-demand certifications, providing signals to people to add those certifications. The expanding pool of people with in-demand skills will in turn support companies’ growth and people’s opportunities. I also expect on-line certifications to be less prone to many of the scandals of on-line colleges, as there will be a clear standard and a faster feedback loop. Some investment opportunities should be available for innovators in this area. 

 

Hylton Phillips-Page

Sadly, young people today save very little. Reasons for the lack of savings range from simply being unable to make ends meet to a sense of entitlement for a certain lifestyle. We live in a world where the pace of technological change is both exciting and terrifying at the same time. Technology will allow us to solve many of life’s problems but will also cause significant dislocations in society as robots and automation replace many human functions. Those jobs will likely be replaced by different types of jobs, as they have in the past. Keeping abreast of the opportunities and the skills needed for them is perhaps the best advice we can give to young people preparing for the workplace. This is a time where savings would be helpful, as young people will need all the help they can get in preparing for a future which requires an ever-changing skill set.

 

For those with investable cash it could be an exciting opportunity to invest in those companies leading the change. We are at a major inflection point in history, similar to the industrial revolution or the introduction of the internet. Artificial intelligence (AI) and robotics will significantly improve productivity and change the way we approach solving these problems. They will of course improve corporate profits too. Quantum computing is at an early stage of development, promising to solve problems in a fraction of the time it takes today. Increased energy needs will be at the center of it all, as (AI) requires as much as five times the energy of a search not using AI. Last but not least, we have a new political administration promising to reduce regulation and speed up the investment and development process. So, there are a number of force multipliers all occurring at roughly the same time.

 

However, you should be aware of the challenges of investing in technology stocks.

• One of the biggest challenges is an even better technology coming along and making your technology obsolete.
• The technology could fail to live up to expectations.
• There is often a first mover advantage that makes it difficult for others to follow.
• There are a number of very large and well-funded technology companies that have the resources to be in any business they desire by investing. They will likely have more money and resources to invest than small start-ups. If all else fails, they often buy out the competition.  

 

The dominant performance of the “magnificent seven” is perhaps symptomatic of this change occurring in the market today. However, there are also many smaller companies embracing new technologies and they are likely to emerge as leaders in the future. Successful investing requires keeping abreast of the companies best adapting to the future. Professional portfolio managers and research analysts are in the best position to identify them. 

 

 

 

 

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Mike Lipper's Blog: New World Rediscovered - Weekly Blog # 872

Mike Lipper's Blog: Navigating a New Investment Landscape Amid Political and Structural Challenges - Weekly Blog # 871

Mike Lipper's Blog: Unclear Data Mostly Bearish, but Bullish Later - Weekly Blog # 870

 

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It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

 

 

Mike Lipper’s Monday Morning Musings

 

It Doesn’t Feel Like a Bull Market

 

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

 

 

 

 

If not Convincingly Up, Maybe Down

With most US stock price indexes near their all-time peaks in the latest week, why are only 37% of stocks in the S&P 500 rising? Forty-six percent of the stocks on the NASDAQ market rose during this period. (The NASDAQ market has more speculative stocks, like technology and smaller financials.  While not strictly comparable, NASDAQ volume has risen +15% year over year, while NYSE volume contracted -19%.)

 

Warning Light

Could it be that investors are sensing a coming decline. Looking at other data series, the US dollar may have peaked. The more economically sensitive Dow Jones Transportation Index has also completed two-thirds of a typical reversal chart pattern.

 

Too Much of a Good Thing

Another flashing warning light is the enormous amount of money made over the last 10 years. (Using total return data on mutual funds and index funds, the following categories have doubled their pretax money in the 10-years through last Thursday: Large Growth, Large Value, Small Cap Growth, Small Cap Value, S&P 500, and S&P 400. The range for these averages was between 2.35X and 2.01X. I have added Financial Services funds which gained 3.57X). I believe that in addition to portfolio earnings growing, there has been multiple expansion. P/E Ratios can move up and down faster than earnings. It is this concern that leaves some of us worried.

 

Others Are Worried

The Depression, which many economists believe started in 1933, actually started at least 5 years earlier in the farmland. Agricultural prices were dropping due to imports, which eventually led to the US putting up a tariff wall. Currently, the farming community, their suppliers, and financial supporters are worried. Some in the farming community expect income to drop 25% in 2025.

 

The stock market would be wise to pay attention to high-quality US bonds, whose yields have risen +116 basis points over the last year compared to a rise of +44 basis points for middle quality bond yields.  (Yields up bond prices down.)

 

Stock market investors who know their history should likewise be concerned about farm prices. Historically, the sharpest analysts following these trends come from the 4 major agricultural trading houses. One of these is Cargill, who has just announced plans to lay off 5% of its workforce. A glance at the 2024 electoral college map reveals the red team dominating the middle of the country. A similar situation forced a Presidential change in 1932, which some believe was a contributor to WWII.

 

Have we Entered a New Market Cycle?

Do many people recognize a change underway early in the long march to a different environment? I believe a change may be underway, but I don’t know where we are going.

 

I recognize that beneath the surface the two major engines driving the world are the USA and China. Both are not as healthy as they portray, with productivity doing poorly when adjusted for inflation. One example is the US significantly leading the world in medical spending, while life expectancy trails behind Japan, France, Canada, and Germany.

 

We are not Allowed to Think Creatively

For the most part our governance and educational systems are highly regimented to reproduce exactly what was or is. This has been difficult for me to recognize. Consider the amount of mathematical thinking in this blog, which comes from being taught to learn from the text or copying from the past.

 

Our systems are designed to produce copycats, or at least controllable members. We do not try very hard to generate creativity. In college we were taught what worked in the past. I only had one critical exam in all things management accounting, where 50% of the final test was “What’s wrong with Accounting?”. This caused me to recognize that GAAP accounting is designed to avoid lawsuits, not to help make investment decisions. These lawsuits might be brought against investment bankers and various marketers. The closest I got to seeing this was during a Security Analysis course with the famed Professor David Dodd of the famed Graham and Dodd, but only during one portion of the course. The lesson was a real eye-opener when we turned to valuing a company in bankruptcy. The first thing we were instructed to do was reconstruct the GAAP accounting by valuing what was salable and at what price. Only a portion of the inventory could be sold, and it was valued after disposal cost. Buildings and land could be valued up or down, depending on use. Finally, there was the cost of shutting down, including appropriately taking care of the employees.

 

I never learned to be a DaVinci, but I came close by watching what Steve Jobs at Apple did. (Even though I currently own the stock, I do not recommend ownership, except for very narrow purposes.) What Jobs created and Tim Cook built and marketed brilliantly was creating new uses for existing technology. I suspect much of what Jobs created came from his studies of Asian religions. Today, it is interesting to see a surprising amount of creativity coming from foreign-born people working for US corporations or investment capital.

 

Question: What have you done creatively?  

 

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Mike Lipper's Blog: Professional Worry Time vs Amateurs’ - Weekly Blog # 865

Mike Lipper's Blog: SPORTS FANS SELECT CABINET & OTHER PROBLEMS - Weekly Blog # 864

Mike Lipper's Blog: Reading the Future from History - Weekly Blog # 863

 

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