Melt Up Not Convincing - Weekly Blog # 899

 

Mike Lipper’s Monday Morning Musings

 

Melt Up Not Convincing

 

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

 

 

 

Contrary Evidence Also Not Convincing

 

Low Transaction Volume, High Chatter

 

Short-Term Implications

 

1. NASDAQ is breaking up. Up volume is leading, while more prices are down than up?
2. Industrial commodity prices rose during the week, 115.8 vs 114.98 the prior week according to ECRI.
3. AAII weekly bullish outlook is declining, 36.8%, 39.3%, and 41.4% over the last 3 weeks.
4. WSJ weekly down prices seem strange. The worst was Natural Gas -12.71%, but the next worst was a -2.82% negative return. This suggests there were few negative prices. Natural Gas prices remained volatile, being up +7.57% the prior week.

 

Possible Longer-Term Implications

1. Trump used construction costs for an already constructed Federal Reserve building to raise the costs of the new headquarters. Chairman Powell spotted it. Assume for the moment this was a honest mistake, it suggests that the President’s staff is lacking something. There have been similar mistakes, some of which were part of the reason the courts ruled against various executive orders.
2. Charley Ellis’ column on David Swensen in the Financial Times listed some of the reasons for Yale’s outstanding long-term record. A long-term focus meant less liquidity was needed and analysis went beyond financial statements to management policies, and well-placed alumni which wasn’t mentioned. I tried to follow his approach.
3. Most US Presidents have focused on managing the government and society as it was when they came into office. President Trump is the fourth president to make fundamental changes. (The others were Jackson, Teddy Roosevelt, and FDR.) Along with the other activists Presidents, the current occupant of The White House wishes to proscribe new ways of thinking to change our behavior. This is what our founders feared, the tyranny of the majority over the minority. Our Constitution and Bill of Rights have built in checks and balances. Consequently, I believe we are going to see more court actions for the rest of this term.

 

Implications?

I believe it’s going to be increasingly difficult to develop a long-term investment policy as we go through a period of attempted structural change.

 

What do you think?

 

 

 

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Mike Lipper's Blog: It May Be Early - Weekly Blog # 898

Mike Lipper's Blog: Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

 

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It May Be Early - Weekly Blog # 898

 

 

 

Mike Lipper’s Monday Morning Musings

 

It May Be Early

 

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

 

 

 

A Usual Trap

A classic mistake in making future plans is focusing mainly on the present. In search of an investment policy for the next few years or longer, one should look at the causes of the main trends, not the size of the tariffs that have been announced.

 

The key force behind the announcements on tariffs is Donald Trump. His background is one of complex negotiations evolved from materially different views of how he sees the present and the future. I believe The President saw a critical problem of unfair trading terms facing the U.S. and saw a way to change the terms in favor of the country. He saw a way to solve the problem through meaningful discussion with the powers on the other side. The key was getting the right people around the table.

 

The core elements of unfairness are to be found in non-tariff trade barriers (NTB) erected by commercial interests with official or unofficial government support. (A number of examples were listed in last week’s blog, copy available.) While there is no published total of each country’s NTB effects, some experts believe their impact is twice the level of tariffs applied.

 

Mr. Trump’s way of dealing with foreign countries is to make the host nation an ally by using the size of US tariffs as a hammer. This is the reason behind the high announced tariffs, which is where President Trump expects the real bargaining to begin. I expect negotiations with major trading partners to take most of the summer. We may never fully understand the various changes to NTB’s, but a good clue will be changes to US tariffs.

 

Clearly there is another element to the aggregate size of the final US tariffs, the amount of cash expected to be paid to the US Treasury. This needs to be meaningful enough to keep the growth of the annual deficit acceptable to an unknown number of Republican Senators.

 

Most of these should be settled in the fall and early winter, so they do not unduly impact the mid-term elections. The economic background to the elections may be influenced by layoffs and the administration’s attempt to expand the economy. Additionally, further international actions may be the cause of how some state elections turn out.

 

The current crosswinds shown below may also impact the level of markets during this period:

1. After a period of outflows, T. Rowe Price is cutting staff.
2. Freight railroads are growing from China to Iran and Spain, for US continental trains, and other trains from Canada to Mexico.
3. Tariffs may encourage smuggling.
4. The latest weekly American Association of Individual Investors (AAII) sample survey showed a 39% positive and negative 6-month outlook.
5. A study of structural bear markets shows the average breakeven to be about 9 years.
6. The critical operating problems facing the US government is no different than those facing commercial and non-profit activities, a focus on effectiveness, not efficiency.
7. Jaimie Dimon has shared the following thoughts:

• Tariffs will be inflationary
• US reserve currency status rests on military superiority
• Markets are not low
• Lessons can be learned from the turnaround of Detroit and problems created (and elongated) during the 1929 crash
• Dollar weakness helps US multinationals 

As usual, I hope you will share your insights on the various thoughts expressed.

 

 

 

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Mike Lipper's Blog: Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

Mike Lipper's Blog: Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

 

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Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

 

 

 

Mike Lipper’s Monday Morning Musings

 

Misperceptions: Contrarian & Other

Viewpoints: Majority vs Minority

 

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

                             

 

 

Every day through the popular press, pundits in or out of political positions express views that our current information will lead to a happy conclusion. Occasionally it will happen and contrarians like me acknowledge that it can and may happen, but the odds it will happen are only 30% to 50%, like the odds a favorite horse winning at the racetrack. By definition, the reward for winning will be the lowest of all horses in the competition. Contrarians can select a different horse with potentially higher rewards by choosing to wager against the majority.

 

Currently, it appears to this contrarian that it’s a particularly good time to take a contrary view of the intermediate period of the US stock market. The primary reason for this view is the bullish feelings presented in the popular press with such shallow thinking.

 

The US Stock Market is Going Up

The weekend press is full of similar statements because the Standard & Poor’s 500 Index (S&P 500) rose a small amount on Thursday. (This gain was given back on Friday when 390 S&P 500 issues declined. More significantly for the week, 54% of the stocks declined on both the NYSE and the NASDAQ.)

 

US Tariffs Announced

The President or White House Personnel announced import duty rates with a limited number of the countries, which in theory would slow the growth of the expected rising deficit. (The higher tariffs likely to be charged on exports from these countries is not known for an obvious reason.) The President is well versed on restrictions imposed on US exports by each trading partner, which are labeled as “non-tariff trade barriers”. These include the following list:

Administrative & bureaucratic border delays

Censorship

Foreign exchange & controls

Import deposits

Capital movement regulations

Licenses

Localization requirements

Standards

Quotas

“Voluntary” export restraints

 

I don’t know of any summing up of the cost of the above barriers, or others not identified. I have seen knowledgeable estimates that are roughly twice the size of the tariffs. President Trump started the whole discussion about tariffs to get high-level meetings with some of the “right” people around the negotiating table in order to deal with the “NTB” issues imposed by various individual countries. As this has not yet happened, I wonder if we have seen a final answer to both the tariff and non-tariff trade barrier issues.

 

Markets Are Not Waiting

Businesses and investors must execute global trades and make investment decisions every day in the absence of firm conclusions to these and other questions. The US dollar relative to other principal currencies has fallen about 12% in 2025, with more expected. This week, Barron’s quoted a participant saying, “The days of the world letting America live beyond its means are rapidly coming to an end.”

 

The Wall Street Journal (WSJ) publishes the price movements of various securities indices and commodity prices each Saturday. This current week 61% of the prices declined. It appears many purchasers of goods and services are not demonstrating an inability to act but are instead unwilling to transact under today’s conditions and outlook.

 

Please let me know what you are thinking.   

 

PS

Some of our subscribers may have known my brother Arthur, who passed away peacefully Sunday afternoon. He led a long productive life helping many people on both coasts and two oceans.

 

 

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Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

Mike Lipper's Blog: Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

Mike Lipper's Blog: Inconclusive Week Hiding a Big Problem - Weekly Blog # 894

 

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Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

 

 

 

Mike Lipper’s Monday Morning Musings

 

Expectations: 3rd 20%+ Gain - Stagflation

 

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

                             

 

 

 

 

3 ½ Day Trading Week

Normally, in a three and a half-day trading week we expect low volume and muted news of any significance to investors with less intense trading instincts and reduced staff levels. This was not the case this past week. Despite initial unruly Republican Party members in both Congressional houses, the so-called Big Beautiful Bill (BBB) tax and tariff bill passed with few amendments. Significant progress was made on reciprocal tariffs and possible trade barriers. Cease fire agreements in Gaza moved toward peace agreements. One suspects a Russian economic crunch, continued causalities sustained in the homeland, and the US threatening reduced US military aid to Ukraine, could hopefully lead to a reduction in deaths and soon become less of a distraction.

 

Trading Reactions

Led by favorable reactions to the passing of the BBB that were cheered on by The White House, many saw things getting better. These reactions stirred up bullish sentiments resulting in the S&P 500 Index reaching its first high for the year since February. Some even suggested 2025 could be the third +20% gain year in a row, a rare event.

 

Professional analysts and experienced economists are two-handed thinkers who don’t receive the same air or face time that advocates of simple tales do. First, the S&P 500 is a capitalization weighted index with a small number of highly valued stocks recording bigger gains than the average stock. An equally weighted index gained 5% less than the S&P 500. More importantly, at least to me, 9 of the 11 industry sectors in the index underperformed the overall index, with Info Tech and Communications doing better.

 

Economists often turn to the actions of corporate leaders for clues as they feel the stock market is too volatile and occasionally wrong in direction or magnitude. Currently, slightly less than half of publicly traded companies have announced employee layoffs going forward. Considering the cost and time spent getting qualified employees, cutbacks are an expensive strategy companies would like to avoid. Part of their problem is that they can’t find qualified new employees today, which means it is particularly painful to let good ones go. This is particularly true for companies with an aging workforce.

 

The lack of success in finding good new employees while keeping the better aging ones is in my mind not a cyclical problem cured by higher sales levels. It is a secular problem caused by the system we have built, which has failed us by confusing education with schooling. The problem starts in the home, often due to a single adult household, and continues on through early childhood education. The impact is felt all the way through PhD studies, with a system awarding promotions through test taking rather than productivity and intellectual integrity.

 

Historical Lessons

Perhaps we can learn from the past. With that thought in mind I recommend reading this week’s Barron’s article titled “The Coming Stagflation Won’t Feel Like the 70’s” by Joseph Brusuelas. I believe there is another parallel that should be considered, the US with an activist President and an accommodating Congress. Both the current occupant of The White House and FDR came into office seeking to make fundamental changes, but both ran into opposition from the courts. FDR took a recession and turned it into a depression, not by choice but in part due to the impact of stagflation. I do not necessarily agree with Joseph Brusuelas’ statistical projections.

 

What do you Think?      

 

 

 

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Mike Lipper's Blog: Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

Mike Lipper's Blog: Inconclusive Week Hiding a Big Problem - Weekly Blog # 894

Mike Lipper's Blog: We may think we manage time, but time manages us - Weekly Blog # 893

 

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Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

 

 

Mike Lipper’s Monday Morning Musings

 

Analyst Calendar: Preparation for 2026

 

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

                             

 

 

Analysts should attempt to get ahead of the stock market. Starting next Tuesday, we are entering the second half of 2025. Using the performance of Large-Cap US Diversified Mutual Funds as a broad indicator of the experience of US investors, the first quarter of 2025 was relatively strong, but April’s second half was weak. Perhaps it was due to concerns about taxes, tariffs, and international turmoil. The Market slumped into June, then recovered through the final four weeks of the quarter, bringing average performance back to mid-single digit gains, with half in the last week, despite a 9% decline in the value of the dollar. Not a great foundation for the continuation of two 20% gaining years.

 

Starting next week, analysts will quietly begin gathering their thoughts on preparing forecasts for the next calendar year. For the most part they will not have the benefit of the proclaimed or quietly guided company estimates. The estimate for 2026 will be more difficult than prior years. Not only will there be comparisons of two 20% plus years, but it is also unclear what taxes, tariffs, and the value of the US dollar are likely to be. There are two other quandaries that should be addressed. We have entered a period where there is a shortage of necessary talent at companies. For tech companies there is a struggle to find AI personnel at prices approaching Wall Street levels. Industrial and service companies have approximately 400,000 open positions, despite many announcing plans to lay-off workers. To some degree, this speaks to the quality of present workers and their attitudes.

 

Another concern is the level of IPOs threatening private equity portfolios with unattractive opportunities to sell some of their holdings. These sales are necessary to raise sufficient cash to pay the dividends expected by present holders and retail buyers. Private markets could contract quickly, constricting private securities firms. An investment trend is normally near the end of its popularity when it becomes dependent on retail buyers.

 

The answers to these questions may not be determined in the third quarter. Even though the fourth quarter is the second highest selling period of the year, it may not provide quick answers for marketing forces expected to produce results.

 

It is possible the market may be saved through efforts in the unofficial “fifth quarter”, which can deliver either surprisingly good numbers or poor ones, setting up a splurge in the first quarter of 2026. These will rely on the increasingly popular “adjusted” sales and earnings per share numbers created through skilled accounting approaches. These are often approved by the firms’ accountants and are not objected to by the regulators.

 

The problem with this exercise is that it makes the following year more difficult for analysts and investors to understand the base for the real earnings power of the company next year.

 

Buyers be thoughtful.

 

 

 

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

Mike Lipper's Blog: Inconclusive Week Hiding a Big Problem - Weekly Blog # 894

Mike Lipper's Blog: We may think we manage time, but time manages us - Weekly Blog # 893

Mike Lipper's Blog: Selective Readings of Data - Weekly Blog # 892

 

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Inconclusive Week Hiding a Big Problem - Weekly Blog # 894

  

 

Mike Lipper’s Monday Morning Musings

 

Inconclusive Week Hiding a Big Problem

 

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

                             

 

 

4 Day Summer Week

Two days of limited stock price gains and losses, with more stocks falling than rising. Market chatter was focused almost exclusively on the Israel-Iran war, with no Fed interest rate change. As usual from a long-term investor’s standpoint no attention is being paid to the continued destruction of the fundamental case for long-term investing. (Not surprisingly, this week’s American Association of Individual Investors’ (AAII) sample survey showed a shrinking six-month outlook for the “bulls” and an expanding negative view of the “Bears”.)

 

We have probably measured human productivity in business and non-profit organizations, including in academia and health care, since the beginning of human activity. Top-down, it has been declining for some time. To find the wasteful culprit accountants assigned organizational revenues and profits to various individuals. This was easy to do for front-line workers and senior management, but the middle of every organization was left out.

 

Left out were the human supervisors, often labeled foremen or middle management. In a period where top-line growth has slowed toward population growth, there is increased concern about human productivity levels. Since the swollen middle was not directly considered revenue or profit makers, their percentage of the workforce shrunk. As a society we are now paying the price for this lack of understanding of this value creation.

 

In far too many cases the supervisory class were the main purveyors of organizational culture, responsible for producing customer-oriented quality. There are hardly any organizations which have not experienced a decline in quality from the users’ point of view.

 

We are about to pay a higher price for this hollowing-out process as new activist management, particularly from the Washington quality culture, becomes a reality. This is especially true as thruput per person becomes the mantra and “AI” and other statistical measures are being implemented. With new activist leaders in Washington, I am worried many government and academic services will decline and to some not add value.

 

As fellow consumers, please share with me any services you receive from organizations that have improved recently.

 

 

Note: At this point we doubt the bombing of the nuclear sites in Iran will change much long term.

 

 

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

Mike Lipper's Blog: We may think we manage time, but time manages us - Weekly Blog # 893

Mike Lipper's Blog: Selective Readings of Data - Weekly Blog # 892

Mike Lipper's Blog: No One Knows: Searching for Clues - Weekly Blog # 891

 

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Contact author for limited redistribution permission.

We may think we manage time, but time manages us - Weekly Blog # 893

 

 

 

Mike Lipper’s Monday Morning Musings

 

We may think we manage time,

but time manages us

 

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

 

 

 

Recognition

When asked for investment advice the most appropriate response is, what is the expected pay-off time? That should be followed by what critical actions are expected during the “work-out” period? The answers to these questions will show both the humility and arrogance of the expectation of success.

 

The plain truth is, we collectively don’t know what the future will bring. The future course of events will be dictated by natural elements, what others do to us, and what we do to ourselves. (Today being Fathers’ Day, it is wise to include the impact of the entire heritage of our thinking and be thankful for it.)

 

The best way I have found to come up with usable answers is to rely on what I’ve learned at the racetrack, which is to assign odds to various logical outcomes. The purpose of the exercise is not the numbers, but a way to rank the various opportunities, remembering that I can be wrong.

 

The real benefit of the exercise is when I am proved wrong. What order of possibilities would have been better? This may include the theoretical Charley Munger and Warren Buffett box, labeled too hard to predict. (The other two boxes were yes and no.)

 

Applying the Approach

Starting with a deep depression, the most extreme example being the falling stock prices between 1929 and 1942. During those years there were periods of rallies and declines, but the extremes were not broken. Prior to that period there was extreme growth of corporate and farm debt. There was an increase in the belief that central governments could materially alter the course of the general economy. Also, during that period an activist political force tried to change the laws and regulations beyond their authority.

 

I have frequently reminded subscribers of the quote that history does not repeat itself but often rhymes. Using the methodology of assigning odds to a potential depression, I suggest there is at least a 40% chance current conditions are predictive of an oncoming depression.

 

Other Problems

• The World Bank has cut its prediction of global growth from 2.8% to 1.4%.
• Moody’s has warned that selling private asset funds to retail clients introduces new risks to private asset managers, including “reputation loss, heightened regulatory scrutiny and higher costs.”
• Robert Gates, former Director of the CIA, Secretary of State, and a former independent Director of Fidelity Funds, wrote “The US can rise to the Chinese challenge” and needs to.
• At least 170 large public companies expect to announce job cuts in June. These companies announcing job cuts do not include private companies, which employ much of the US work force.

 

While I perceive a more than average number of problems related to investing in US equities over the next few years, I remain bullish about investing in US equities. Our geographic position, the dollar size of our commercial and financial markets, and our eventual ability to surmount our problems, all support continued stock investments in the US for long-term retirement investment accounts.

 

What do you think?

 

 

 

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

Mike Lipper's Blog: Selective Readings of Data - Weekly Blog # 892

Mike Lipper's Blog: No One Knows: Searching for Clues - Weekly Blog # 891

Mike Lipper's Blog: “Straws in the Wind”: Predictions? - Weekly Blog # 890

 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.