Searching for Surprises - Weekly Blog # 659

 Mike Lipper’s Monday Morning Musings

Searching for Surprises

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

                           

                        

Julius Caesar, in writing about his victory over the Gaul (now France), claimed he was never surprised as a military leader but spent three days burying his dead. To me, that is the definition of a painful surprise. One of the responsibilities of a prudent investment manager is to avoid as many meaningful surprises as possible. A meaningful surprise is one that prevents the accomplishment of a strategic goal.

To accomplish this goal, one should keep an eye on the significant changes to conditions of future battles that others are not anticipating. An aware investor probably anticipates more change than occurs. Also, some surprises won’t be anticipated, but will be helped by a quick reaction coming from being prepared for surprises. My attempt with this blog is to identify possible future surprises that will disrupt the return to the past “normal”.

Competition is Changing

There are two ways competition changes, through composition and conditions. In the investment arena we are seeing a number of old large investment groups acquiring mid-sized competitors, either through buying the whole company or a critical portion of it. These are different than in the past and are industry deals to pick up assets without keeping duplicate administration and marketing structure. Over the last couple of weeks we have seen two examples of non-standard bulking up of assets, where needed capabilities were believed to have been acquired. Morgan Stanley (*) acquired Eaton Vance (*) to broaden its distribution capabilities beyond its own largely wealth management force. In a somewhat similar fashion, the owner of the Delaware Funds (Australian money manager Macquarie Group) is buying the fund management assets of Waddell & Reed. The two acquisition targets have been in the fund business for many decades and are older than their larger acquirers. Competitors will now face a broader product line and an entrenched competitor in more distribution channels. These transactions are signaling that fund management peers should expect stiffer competition in the future, likely through fewer competitors. A sign of these concerns occurred last week when Jaime Dimon asked competitive investment bankers in an investors meeting to surface attractive M&A candidates to him for JP Moran Chase (*). One can see the urge to acquire is very high if the largest US bank in terms of assets, with its own investment banking group, asks for help with their own M&A.

(*) Mentioned securities are either owned in managed accounts or personally

There are some who believe the size of passively managed pools will be larger than actively managed pools by 2022. I hope that is true, nothing will be better for actively managed money than fewer competitors. Another way competition changes are when the rules of the game change. Nielson has indicated that in 2022 it will be able to track the inclusive viewing habits of television and much of social media, assisting national and local efforts to gather consumers and voters. Much of the success of E Commerce is based on its display and pull through the internet, while most “big box” stores rely more on television and print advertising. An advantage of older media was that it may have added credibility to the merchants and merchandise offered. To the extent that benefit still existed, I believe it was largely lost through the last presidential campaign as these mediums erroneously broadcast the belief of the great “blue wave” and other elements of questionable veracity. This has already contributed to the decline in the number of daily newspapers. While well managed Department stores will survive based on their merchandise skills, there will be fewer of them. While one can’t guess all the new regulations and fees/taxes that will be heaped on the distribution system, the safe bet is that it will be more expensive to distribute products and services in the future. If anything, the value of brands will likely be enhanced.

The Ticking Time Bomb of Inflation

Almost all engines have pressure release valves or mechanisms and this is equally true for human interactions and economics. When a pressure release mechanism is blocked, additional pressure is applied through other  releases. Major Central Banks, directed by their national governments, have successfully prevented interest rates on government bonds from registering the inflationary pressures that have been building in their economies. This pressure has been  reflected in both the world of commodities and currencies.

In the last couple of blogs I focused on the JOC-ECRI Industrial Price Index, which could be rising at close to a parabolic rate. This week on a year over year basis it is reading +19.65%!! This index is heavily influenced by the price of scrap metals, which are critical in the manufacture of steel and related products. Much of the demand is coming from Asia, particularly China. Large commodity speculators are significantly long almost all industrial and agricultural commodities, except for T Bonds and S&P Mini futures.

At some point in the not-too-distant future the size of the US government debt will prevent foreign buyers from buying US debt that pays less than the perceived inflation rate. Both residents of the White House and Congress in both parties have contributed to this explosion of interest rates. It will hurt the non-investment class most, as they can’t escape its effects through non-dollar sources of income and capital protection.

Investment Conclusion

Bank of America (Merrill Lynch) probably has the wisest recommendation, “Buy Prudence, sell exuberance”. Because of the rise in the number of IPOs and SPACS, exuberant speculation appears to already be present. I tend to believe that trading on the NASDAQ is savvier than on the New York Stock Exchange (NYSE). The NASDAQ is more individual stock oriented than the NYSE, which is used extensively by index funds and subject to many more public investors. Last week the NASDAQ with only 16% more issues had 5 times more new lows than the NYSE. So be careful, remember the name of the game is the survival of your capital, as it periodically grows. 

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

https://mikelipper.blogspot.com/2020/12/an-investment-dilemma-with-possible.html

https://mikelipper.blogspot.com/2020/11/mike-lippers-monday-morning-musings_29.html

https://mikelipper.blogspot.com/2020/11/approaching-multiple-turning-points.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 - 2020

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.