Mike Lipper’s Monday Morning Musings
What is Next After the Next Next?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Most people focus on the current conditions. However, as someone who has always been influenced by repetitive history, I wonder whether we are approaching a significant turning point. While I do not know, I believe it is worth pondering. Allow me to sight three events that identified turning points that changed the pursuits of individuals and nations around the world.
It was not WWI itself, but the failure of the peace in solving the political problems facing Europe and its place in the world. The development of the airplane changed the modern world, ending geographical isolation and igniting the rapid development of mass arms manufacturing and radio as political weapon.
WWII relied on political leaders inciting their populations to go to war, the development of long-range missiles, nuclear energy, and substantial improvement in medicine/hygiene.
Current Condition
During the current pandemic, many political leaders across the world have put their citizens on a war status, by limiting their movements and working conditions. They are also rapidly developing specific therapies and hopefully cures. The US and other stock markets around the world have ended an expansion driven by lenient and inexpensive credit restraints for both the private and public sectors. We entered the fastest bear market ever, in an economic and financial world measured instantaneously. Whether it is over is subject to debate.
Readers of these blogs know that I identified the March 18th low as a “stealth bottom”. It was successfully tested on March 23rd, which was lower but did not bring on new waves of selling. There are a significant number of market followers, perhaps 1/3 of the financial community, who believe a lower low is coming. They could be correct but utilizing my odds tracking experience I don’t think so.
The following statistical sample utilizes the average mutual fund performance from 3/19 to 4/16, which arrays in a pattern seen in the last bull market: Growth funds +17.27%, Core funds +14.87%, and Value funds +13.48%. The more narrowly focused funds were led by Global Science and Tech. +21.16% and Real Estate +20.46%. These were followed by mid and small-cap funds.
The leading performance of narrowly based funds is significant because they do not have the same market liquidity as the larger and more diversified funds. Investors appear to be willing to accept more risk, suggesting they may believe we have seen the bottom.
If there is going to be another major down-leg, there is lots of “dry powder around to absorb it. Money market fund assets have reached record levels, with retail investor’s cash reserves now representing 14% of their allocation. Last quarter clients of JP Morgan Investment Advisory accounts added $75 Billion in liquid reserves, while redeeming $2 Billion in long-term accounts.
Those who follow the investment management business are familiar with Howard Marks. (I have known him since he was a portfolio manager of a closed-end convertible securities fund in the early 1980s.) He has been a very successful investment manager since his early days. Recently he sold control of Oaktree Capital to Brookfield Asset Management, retaining his ownership in the company. His public intention is to raise $15 Billion in a distressed securities fund. One can read this two-ways, he may be anticipating a lower market where he can buy cheap assets, or he could be anticipating an opportunity to sell assets at higher prices.
The Next after The Next
There is a good chance the investment world will not return to “normal” once we declare victory on COVID-19. I believe this period of working from home in various forms of isolation has fundamentally changed our behavior patterns. How we live, operate, invest, shop, entertain, receive healthcare, contract for loans/insurance, and how we conduct family and other relationships. At some point we will come to the realization that we have become too fixed-asset oriented. I expect changes in shopping, education, and healthcare. Furthermore, we will become more dependent on technology for all these things, through instruments like the Apple Watch, cell phones, and other instruments not yet on the market.
As investors we may be paying less attention to physical assets and more attention to leadership, applied to our specific needs. Management will need to get out of their offices, plants, and laboratories to learn of our desires and how they can solve our problems. I expect the world of my grandchildren and great grandchildren will be quite different than they are today, creating an additional burden on me as an investment advisor. Please help with any suggestions you have.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/04/long-term-investors-mistakes-ahead.html
https://mikelipper.blogspot.com/2020/04/time-to-get-out-of-foxhole-weekly-blog.html
https://mikelipper.blogspot.com/2020/03/where-we-are-depends-on-where-we-have.html
Did someone forward you this blog? To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 - 2018
A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.
- An important change in the direction of human behavior after an extended period of time.
- An event or a series of events that distinctly break with the past.
- Prominent actors primarily focusing on current problems and being oblivious of the long-term implications of their actions. Three examples are: The end of the Dark Ages in Europe, World War I, and World War II. Each example resulted from the following:
- A different kind of pivotal leadership
- A weakened old order, both politically and economically
- A relatively small invention that changed many lives
- The introduction of a period of rapid change
- People willing to participate in radical change
It was not WWI itself, but the failure of the peace in solving the political problems facing Europe and its place in the world. The development of the airplane changed the modern world, ending geographical isolation and igniting the rapid development of mass arms manufacturing and radio as political weapon.
WWII relied on political leaders inciting their populations to go to war, the development of long-range missiles, nuclear energy, and substantial improvement in medicine/hygiene.
Current Condition
During the current pandemic, many political leaders across the world have put their citizens on a war status, by limiting their movements and working conditions. They are also rapidly developing specific therapies and hopefully cures. The US and other stock markets around the world have ended an expansion driven by lenient and inexpensive credit restraints for both the private and public sectors. We entered the fastest bear market ever, in an economic and financial world measured instantaneously. Whether it is over is subject to debate.
Readers of these blogs know that I identified the March 18th low as a “stealth bottom”. It was successfully tested on March 23rd, which was lower but did not bring on new waves of selling. There are a significant number of market followers, perhaps 1/3 of the financial community, who believe a lower low is coming. They could be correct but utilizing my odds tracking experience I don’t think so.
The following statistical sample utilizes the average mutual fund performance from 3/19 to 4/16, which arrays in a pattern seen in the last bull market: Growth funds +17.27%, Core funds +14.87%, and Value funds +13.48%. The more narrowly focused funds were led by Global Science and Tech. +21.16% and Real Estate +20.46%. These were followed by mid and small-cap funds.
The leading performance of narrowly based funds is significant because they do not have the same market liquidity as the larger and more diversified funds. Investors appear to be willing to accept more risk, suggesting they may believe we have seen the bottom.
If there is going to be another major down-leg, there is lots of “dry powder around to absorb it. Money market fund assets have reached record levels, with retail investor’s cash reserves now representing 14% of their allocation. Last quarter clients of JP Morgan Investment Advisory accounts added $75 Billion in liquid reserves, while redeeming $2 Billion in long-term accounts.
Those who follow the investment management business are familiar with Howard Marks. (I have known him since he was a portfolio manager of a closed-end convertible securities fund in the early 1980s.) He has been a very successful investment manager since his early days. Recently he sold control of Oaktree Capital to Brookfield Asset Management, retaining his ownership in the company. His public intention is to raise $15 Billion in a distressed securities fund. One can read this two-ways, he may be anticipating a lower market where he can buy cheap assets, or he could be anticipating an opportunity to sell assets at higher prices.
The Next after The Next
There is a good chance the investment world will not return to “normal” once we declare victory on COVID-19. I believe this period of working from home in various forms of isolation has fundamentally changed our behavior patterns. How we live, operate, invest, shop, entertain, receive healthcare, contract for loans/insurance, and how we conduct family and other relationships. At some point we will come to the realization that we have become too fixed-asset oriented. I expect changes in shopping, education, and healthcare. Furthermore, we will become more dependent on technology for all these things, through instruments like the Apple Watch, cell phones, and other instruments not yet on the market.
As investors we may be paying less attention to physical assets and more attention to leadership, applied to our specific needs. Management will need to get out of their offices, plants, and laboratories to learn of our desires and how they can solve our problems. I expect the world of my grandchildren and great grandchildren will be quite different than they are today, creating an additional burden on me as an investment advisor. Please help with any suggestions you have.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/04/long-term-investors-mistakes-ahead.html
https://mikelipper.blogspot.com/2020/04/time-to-get-out-of-foxhole-weekly-blog.html
https://mikelipper.blogspot.com/2020/03/where-we-are-depends-on-where-we-have.html
Did someone forward you this blog? To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 - 2018
A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.
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