Mike Lipper’s Monday Morning Musings
Currently, Selling More Important Than Buying
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
July is often a low volume, relatively quiet, stock market period. August, with its different conventions, COVID-19 progress and short-term economic signals, will likely be more lively. This is therefore the ideal time to look at portfolios with two to one hundred plus securities. Include in your analysis both all the cash that could be invested and probable cash demands well into 2021. This review is unlike the usual process of buying some new and exciting investment, where you quickly find the money for your new “almost certain winner”. However, most of the time new purchases will not drive next year’s performance, it will be more impacted by the remaining portfolio.
Remember March
Many investors feared that the one-month dramatic fall in stock indices was the opening salvo of a long, protracted “bear market”. As usual with mass fears, it did not happen for political reasons. Yet, although there was still some of the normal cleansing effect of an economic recession, it was perhaps not enough.
Record 2nd Quarter Continuing
With governments and their junior partners, the central banks, induced a strong rally occurred led by speculative forces, including the not yet dead zombies that should have been liquidated. The NASDAQ Composite gained +30.6% in the quarter and continued through Friday with another record high, gaining +4.01% just last week. Globally, the big winners were two handfuls of large-cap technology-oriented stocks. Even with the increasing levels of tension with China, their stocks are the biggest winners as an investment region thus far in 2020. Last week, 16 out of the 25 best performing SEC registered mutual funds for the week were primarily invested in the China Region. (Even within China, the controlled press warned local investors to be careful with record prices and a wave of new IPOs.) In the US markets, 75% of the weekly prices for ETFs, stock market indices, currencies and commodities were higher. Translating all this bullishness into mutual fund performance for the funds we are particularly interested in, some had gains better than 50% from the March lows. One might suggest that some investors are experiencing a sugar or other stimulant high.
Outlooks
There are as usual a myriad of outlooks depending on both direction and varying time periods. While investors should sub-divide their portfolios into different time periods based on the expected needs for their capital, they do not. Unfortunately, most investors, particularly those competing for new money, are fixated on 2020 results. This is unfortunate because I hope the future does not contain many years similar to 2020.
Six Month Positives
The AAII, usually a reliable contrarian indicator, has now flashed four straight weeks where their sample survey of member market expectations for the next six months was over 40% bearish. This number is unusually strong both in magnitude and duration. While they could be correct this time, it would be surprising.
Longer-term Concerns
Citigroup has a model identifying periods of panic and euphoria designed to predict the stock market one year into the future. It is based on tracking extreme current market behavior that will lead to a reversal the following year. The current reading from this model points to lower stock prices a year from now resulting from the short-term euphoria we have been experiencing.
Barron’s publishes a weekly chart on the movement gold mining stock prices vs. bullion prices. Recently, the price of the metal has been rising gently while the index of mining stock prices has been rising sharply, suggesting buyers of mining shares expect materially higher prices in the future. Most mining companies are highly leveraged, with operating expenses, debt, and stiff taxes. Traditionally, when the price of gold goes up, most other stocks go down. Mario Gabelli, a well-known and respected investor, expects 2021 gross margins to decline.
Recently, there has been an increase in the number of people believing that there is a reasonable chance of a ”blue wave” coming in the election, with the Democratic-Socialists winning the Presidency and both houses of Congress. If that were to happen, many believe taxpayers and consumers would forfeit twice, both with taxes and inflation rising measurably. If the “blue wave” does not materialize, it is likely that only accelerating inflation will cause the squeeze on gross margins that Mario expects. Both party’s policies will lead to an increased cost of living. Under any of the feared circumstances, the long-awaited relative price performance of some value stocks will likely improve.
The Poor History of Escaping from Cash
In the last fifty years or so, we have seen attempts to escape expected sharp gains in inflation, leading to the liquidation of some assets like cash in order to invest in “real assets”. Remember when the Japanese bought high-priced golf courses around the world to escape their inflation. They paid premium prices for classic real estate, e.g. Rockefeller Center.
For perhaps twenty years, Chinese citizens and relatives of political people have been exporting their wealth to Western countries whenever they could.
In the West, the wealthy have bid up popular pieces of art to ever higher prices. Many financial writers scoffed at the high prices paid for these foolish purchases, not recognizing that the buyers were actually selling an over-priced currency held in surplus. Perhaps this is what is in the mind of the current “goldbugs”?
My guess in all these cases, even measuring at their lower exit prices, the exporters will come out ahead of those that stayed completely in their own currency.
What to do?
- Make a list of your current assets and resources net of obligations. Put the list in descending order as a percentage of wealth.
- Pay particular attention to the top half of the wealth pile and ask if you would choose to have that much of your wealth so exposed today.
- Staying with the top 50% of the list, what could negatively impact its value. Separate the list into general calamities and specific problems, e.g. labor problems combined with unfavorable governments.
- Determine whether there are hedging or opposite vehicles for each specific risk, as well as more general risks. Energy and airlines are opposite vehicles.
- View the costs of hedging or contrary investments as an insurance premium, much like what you might pay to fully insure your home or jewels.
- Rearrange your assets with the potential gains and losses, including the theoretical insurance premiums.
- Repeat once a year.
Please share your thoughts with me on the subjects and approaches mentioned.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/07/july-4th-lesson-need-to-hire-wise-not.html
https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html
https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html
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A. Michael Lipper, CFA
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