The Markets Are Moving - Weekly Blog # 691

 

Mike Lipper’s Monday Morning Musings

“The Markets Are Moving”

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

Around the world and in many tongues we are told that prices and sentiment are changing in an unexpected way. Though we primarily focus on a single market we are conscious of many markets and issues, both domestic and international, in stocks, bonds, currencies, commodities, real estate, art, and politics. Each play a role in my mind as I attempt to assign a classification: fad, fashion, flows, and level of importance to various fluctuations. As with studies identifying the cause of wars, it is useful to identify the multiple minor elements and a final actionable cause.

Investors have identified the secret to being successful, as “winning by not losing”. Refining this slogan, I suggest both losing little and infrequently. With these objectives in mind, I’ll examine some of my underlying concerns about the US stock market. I am not alone, a large broker/bank’s market research team just headlined “Bearish divergences everywhere”. In scanning the present scene, I see lots of issues that should be reviewed. Below are the items listed in the order they appeared to me, without ranking or considerations toward linking them. In other words, be prepared for a water hose delivery.

Negative Numbers

• The Conference Board’s Leading Economic Indicators - Expected +0.9% vs +0.7% actual. 
• JOC-ECRI Industrial Price Index up +1.24% for week. 
• More down vs up volume 11/10, on the NYSE this volatile week. More declining than rising volume suggests sentiment is shifting toward the downside. 
• 1.5 year drop in life expectancy due to COVID and drug overdoses 
• American Association of Individual Investors (AAII) weekly survey of investor sentiment shows, bullish and bearish being exactly equal at 30.6%. This is normally a contrary indicator and an equally bullish/bearish reading suggest a lack of conviction in either direction and late reaching that conclusion.

Structural Concerns

• Average profit margins of the “FAANGM” ex Amazon is 25.3%, vs 12.9% for the S&P 500 ex leaders. High profit margins are clustered in a few technology stocks that did well during the restrictive COVID period. 
• Transportation supply chain disruption is structural due to lack of equipment and trained people. Will likely lead to higher prices and increased inflation until resolved.
• Global Test Score Rankings for the US: Math 37, Science 18, Reading 13. Lower rankings suggest the US will lose its leadership role in innovation, particularly if it cannot attract foreign talent with the necessary skills.
• Number of analysts at 12 investment banks: 4,400 in 2012 vs 3,100 in 2020. The growth in passive investing has led to a reduction in analyst coverage, perhaps creating increased opportunities for active investors in a less efficient market.
• 19% of the NASDAQ composite has no regular analyst coverage. This again is a potential opportunity for active investors.
• Too much money chasing private companies. Private Equity/Credit firms raising prices and lowering covenants. More capital chasing increasingly speculative companies in the illiquid private markets will likely increase risks.  

Working Investment Conclusion

Following the principle of winning by not losing, I suggest a review of intended long-term holdings. Identify those that you would buy more of at 25%-50% below today’s price. Treat those that don’t meet this hurdle as trading vehicles to be reduced in rising markets and expect significant price reductions in declining markets.

Please contact me if you would like to discuss any of the items mentioned.

Critical Question of the Week:

Have you developed your strategy for a market that is going to be driven increasingly by political trends through 2022? 

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

https://mikelipper.blogspot.com/2021/07/correcting-impression-and-gaining-some.html

https://mikelipper.blogspot.com/2021/07/sentiment-appears-to-be-changing-weekly.html

https://mikelipper.blogspot.com/2021/07/independence-day-3-investor-lenses.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.