Mike Lipper’s Monday Morning Musings
Two Contrarian Questions:
1. Next Recession?
2. Is the NASDAQ Leading?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Position in Polite Society
In a global society searching for popularity, anyone posing the two blog questions would be labeled a contrarian. That person first needs standing to voice a view significantly different than the commonly believed view. To understand my occasional contrarian views and questions, one should understand their origin and basis.
The Origin of My Contrarian Questions
As with others, I tend to learn more quickly and deeply when my money is at risk. While in grade school and secondary school I was an indifferent student, particularly in precise subjects. Numbers only took on real meaning when I was introduced to the New York racetracks. Suddenly, the eight or nine races a day focused my adolescent attention on statistics and other factors that would lead to losses and gains. I started out behind, as I charged my expenses (going to the track and lunch) to my at-risk budget. After-all, I was going to the track to make money, not for a day in the country or entertainment.
Below, I briefly outline the aspects of what I learned at the track, which have carryover implications for investing:
- There are too many variables in terms of the number of horses, races, and conditions to be reasonably expert on all. (Screen opportunities to find the best selections)
- The most popular bets, if won, would at best pay off an equal sized losing bet. Favorites win less than half the time. (Thus, betting only on favorites is a losing proposition)
- Most bettors have a narrow selection process heavily focused on the most current information, with a home track bias. (More complete analysis often suggests this race is different than the immediate past)
- Because of the differences in odds, one can finish the day ahead by winning only one of three races. There are also times where one can win more on the second horse at the end than the first. (The correct handling of money can enhance the results, such as weighting the size of bets and paying attention to the probability of results.)
The Next Recession
As someone with a contrarian bent, I believe the next recession is closer than most expect. During the fourth quarter it is common to see projections for the coming year. Most of what I see suggests 2022 will struggle to produce essentially flat results, partially because of the significantly above trend in 2021. Many forecasts do not even mention a recession or suggest a very low chance of one. From the above discussion this prediction sounds like a bet on a favorite, which would be reasonable. But the absence of a discussion on the lengthy period since the 2013 recession is not prudent. Yes, we may be coming out of a downturn in the economy labeled with COVID headlines, but the downturn experienced was not a standard cyclical decline and is therefore outside the history books. Perhaps future historians will label it a recession and take some of the inevitability of recessions off the table for a while.
Throughout recorded history we have regularly had periods of expansion and contraction generated by external and internal causes. External causes usually result from increases in demand caused by new markets or resources. Contractions are mostly caused by over expansion, usually through excessive debt generation. Military and trade wars may start out as expansions but eventually lead to contractions because of the resources wasted in these battles.
Increasing exposure to non-bonded credit is the current flavor of the month in the institutional and high net worth portion of the markets. A decreasing minority of institutions have yet to increase their exposure to “privates” or alternatives. The initiators of these debts are probably raising entry prices while simultaneously lowering safety covenants. At the very same time the Chicago Federal Reserve Bank and the Bloomberg indices of financial conditions are deteriorating. Politicians around the world and around the corner, in governments of all sizes and shapes, are encouraging increased spending, meaning more debt issuance.
I cannot predict the time when all these trends will create some combination of a recession and or financial crisis, but prudent investors are not currently being offered enough reward to offset the inflation and currency risks.
Is the NASDAQ Leading?
As there are “horses for courses”, there are market conditions favoring one kind of bettor or investor. Part of the problem we analysts face in determining what may happen, is not knowing the individual or institution motivation in buying or selling a security. At best we have “circumstantial evidence”, which can lead us in one direction or the other.
One of the factors in understanding the strength of various bets at the track is how much they are influenced by hometown biases and similar tie-ins. To some degree I can play a similar game by looking at the differences in trading on the New York Stock Exchange (NYSE) and NASDAQ. Thus far in 2021, the stocks listed on the NASDAQ have produced a higher return than those on the NYSE and Dow Jones Industrial Average. The NASDAQ stocks also led the decline this autumn.
This Friday was an up day for the market, which highlighted the following similarities and differences in the NYSE and NASDAQ:
NYSE NASDAQ
Up Volume 2.07 mil 2.09 mil
Down Volume 1.74 mil 2.26 mil
New Lows (% stocks traded) 6.7% 17.1%
Stocks on the NYSE are on average older, larger, and more cyclical than those on the more junior exchange. To my mind there is a meaningful difference in the mix of active traders on the two exchanges. The NYSE is almost completely the home of passive stock index investors, including institutions and investors taking advice from brokers, now styled as wealth managers. By contrast, much of the volume on the NASDAQ is generated by active professional traders. (One of the regular rumors at the racetrack is that the “smart money” is betting on a specific horse, causing the betting odds to drop due to unexpected inflows.) Since NASDAQ prices led on the way up and down, I am wondering whether it is the current home of the “smart money”.
The Value of a Contrarian
I believe the smartest thing I did as Chair of a non-profit investment committee was to mostly limit the membership of the committee to active professional investors. I searched for a bearish investor and was able to get one with a long record of shorting stocks. In most years he was quite successful. He was a great addition to the committee in two ways. First, he questioned many of the buy recommendations from other members of the committee, including its chairman. The questioning led to some recommendations being withdrawn. He also contributed one of our big winners, a company trafficking in a little followed area that was not held in high repute, defaulted residential mortgages. It worked out very well and was a very good diversifier.
A contrarian’s value is enhancing the investment discussion and process. Contrarians do not count their ratio of gains vs loses, but the aggregate sums of money earned vs loses.
Question of the week: Are you getting sufficient contrarian views to help with your decision process?
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2021/12/selections-weekly-blog-710.html
https://mikelipper.blogspot.com/2021/11/investors-be-alert-to-novembers-risk.html Mike Lipper's Blog:
https://mikelipper.blogspot.com/2021/11/best-bet-more-sweaters-and-parkas-vs.html
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