Contrarian Observations, Not Predictions, But Concerns - Weekly Blog # 573

Mike Lipper’s Monday Morning Musings

Contrarian Observations, Not Predictions, But Concerns

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

Contrarians look at the world differently, searching for misleading, generally accepted view-points. My purpose is to not to be contrary, but to look for opportunities to reduce risk and make an unexpected profit. While one of the maximums of trading is that “the trend is your friend”, the contrarian believes that all trends eventually end. After the trend ends there is a shift in direction, often a dramatic one. This week’s blog looks at several current observations that could be sign-posts for a change in direction. The prudent investor should consider these to be possible early warnings signs.

Long-Term Observations
Through the 18th of April the average US Diversified Equity fund gained +15.86%. This rise is significantly higher than the 2019 earnings per share projection for the underlying stocks in the portfolios. If there were no further performance gains by the end of the year, the performance comparison versus the historic gains of the S&P 500 since 1926 raises some questions. Of the 92 completed years, only 42 or 45.6% were better than the 4 ½ months of this year. An actuary would question further progress in 2019.

In reading “The Unlikely Reformer”, a book by my friend Matt Fink. In the book he discusses the history of Carter Glass (Glass-Steagall, Federal Reserve Act, Securities & Exchange Act of 1934). The book makes much of his deep concern for the amount of bank issued credit used for speculation by Wall Street. Today there are some that are similarly concerned, but not about the retail credit used in buying stocks. The concern is about the build-up of corporate credit, which has been issued under very liberal terms for acquisitions and buy-backs of common shares. One of the multiple causes of the Great Depression was the explosion of credit. Some see a similar pattern regarding the explosion of credit issued largely outside of the banking system. 

Intermediate-Term Concerns
Two mouthpieces are telling us not to worry about inflation.

• Robert Kaplan, the president of the Dallas Federal Reserve Bank, ex Goldman Sachs partner and Harvard Business School Professor stated, “No Threat of Inflation”. 

• Bloomberg Business Week’s cover asks, “Is Inflation Dead?”. 

There is an old Biblical Expression “Man plans, and God Laughs”. One of the things I learned from the racetrack is that occasionally a long-shot wins. Surprises are normal in the history of economics, business, politics, and markets. Though the rate of inflation has been low for many years, I suspect it may not continue.

There has been wide dispersion in the performance of equity mutual funds for the five years ended April 18th. The average S&P 500 index fund gained +11.31% annualized, while the average Financial Services Fund gained +8.37% and the average International fund gained +3.33%. Looking to the future, the odds of a similar performance spread and rates of gain are at best questionable.

Shorter-Term Questions 
The three stock price composite indices around the world currently performing best are Shenzhen +38.8%, Shanghai +30.5%, and NASDAQ +20.6%. All three indices are fueled in part by a combination of technological products and services, easier credit, and IPOs. Are these gains sustainable?

A partial answer to the question above is reflected in the two largest ETF short positions as a percent of the shares outstanding: iShares China Large Cap 17.3% and SPDR Bloomberg Barclays High Yield Bond 17%. I don’t know whether the bulk of these holdings are for hedging purposes or directional bets in a speculative Market.


Question of the Week:
Did anything happen last week that is causing you to change your investment positions or attitudes? 




Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/04/not-yet-peak-luck-lessons-weekly-blog.html

https://mikelipper.blogspot.com/2019/04/investing-in-quality-for-growth-or.html

https://mikelipper.blogspot.com/2019/03/investment-committee-and-investors-be.html



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