Mike Lipper’s Monday Morning Musings
We are Progressing
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
This is a blog on investing and is not intended to express any political views. Every single action we take, including taking no action, is an action. Every single action we take has less of a future impact for those we care for emotionally or legally, be they the next moment, day, week, month, year, or the rest of our lives. With that thought in mind, my focus is on the indefinite time periods for those we hold ourselves responsible.
This blog is focused on an investment period measured in years, comprising multiple market cycles. In sharing my thoughts, I am very conscious that humility is the only guarantee in investing. There will be periods of elation and depression as we travel through the various phases of market cycles.
Point of Departure
I believe markets move within their own cycles. I find it useful to measure from peak to trough for the styles of investing which identify most of what we do. In the absence of detailed knowledge concerning the structure of an investment account, I use three major stock indices for the US equity market. The NASDAQ Composite Index, which topped out last November, contains future oriented securities valued for their growth potential. The S&P 500 Index, which peaked on the 4th of January, is meant to contain the 500 largest and most liquid US stocks traded in the US. The S&P 500 Index is representative of the bulk of long-term US stock investments and is often used by institutions to represent “the market’. The Dow Jones Industrial Average (DJIA), which topped out on the first day of 2022, is a selection of the 30 most representative stocks.
Where Are We?
As a working assumption I believe most US equities have topped out for this phase. What phase we have entered is the question investors are asking. The choices are:
- A minor fall to a support level like the Dow Jones Transportation Index, a key component of the oldest market timing model, the Dow Theory.
- The NASDAQ Composite Index, which fell beyond the 10% correction level used by the press.
- The S&P 500 Index, which is close to entering a correction phase, to be followed by the DJIA.
As we manage long-term money, which has long-term payout needs measured in lifetimes, I believe we have entered a downward slope with periodic upward trading opportunities. (57% of NYSE stocks and 61% of NASDAQ stocks fell last week.) Hardest hit were growth funds, with the T. Rowe Price Growth Fund falling -4.38%, the worst of the 25 largest growth funds.
Focus
Instead of focusing on trading opportunities, I am focused on the likely investment opportunities in the subsequent rise in the market after the valley. To get to the happy hunting ground we will have to deal with expected problems. In time order: Ukraine, inflation, and Long COVID.
Ukraine
As is usually the case, the media and politicians are focused on the wrong things. First, the Russian Army has a significant number of conscripts due to return to civilian life who are not battle trained. They would suffer significant casualties, which would not go down well within Russia. If the Russians invade, they are likely to suffer casualties caused by a well-armed and trained army and volunteers. They have a lot to fight for, as shown below:
- The Largest proven recoverable Uranium resources in Europe
- 2nd largest explored Manganese ore reserves in the world
- 3rd largest exporter of iron ore
- 4th largest array of natural gas pipelines
- 8th largest number of installed nuclear plants
To an important degree, Putin has already accomplished his goal of weakening NATO by showing the unwillingness of Germany to take up arms, followed by Italy and a weak US response. So far, the only negative from Putin’s point of view is the push by Sweden’s second largest political party to join NATO.
Inflation
From the White House’s viewpoint, it is pleased the market is doing the job that the Fed was meant to do. The markets most sensitive to short-term inflation are the commodities markets, which are pricing commodities higher in the near-term than the longer-term. Members of Congress are preventing the White House from adding to the problem, by resisting an increase in money supply growth.
A study of 19 recorded pandemics over 700 years shows real interest rates falling in all cases. However, a complete solution to the supply chain issues has several hurdles to overcome and is unlikely to be solved before the next Presidential election. These include:
- A shrinking number of petroleum refineries, from 301 in 1982 to 124 today.
- The absence of new mineral production and severely restricted new mine and pipeline volumes.
- Fewer skilled workers and supervisors returning to the workplace due to Long-COVID.
Long COVID
Long COVID is the inability of some workers to return to the workforce due to PASC symptoms, which stands for Post-Acute Sequalae of SARS COVID. (Cumberland Advisory has a good blog on their panel discussion on the subject.) One study predicts between 10 and 20% of those who get COVID will get the Long version. One must expect other pandemics in the future, and we have not yet come to an understanding the best way to reduce their damage.
Investment Shopping List
While it may be a long-time before a terminal bottom is hit, and more importantly recognized, one should start building a shopping list. There are two categories that appear to be worth examining: common denominators and the not yet dead that are still working.
Common Denominators
At times it is difficult to pick a potential winner out of a crowded sector. I have followed two approaches on this issue.
- The first is to find a sound sector manager or fund to make individual choices. The problem is that manager’s need to diversify, resulting in too many choices. The second is to find one or two stocks that capture most of the future expected benefits. Two common denominator stocks in the financial services industry are Moody’s and S&P Global (already owned). Internal developments and acquisitions should capture additional business. These are to be put on the hunting list and should not be bought today, they are already more than adequately priced.
- The second approach is to look at the non-winners in the current market to see if the sick/dying corpses have elements that will blossom in a new market. I use the multiple of current price to sales as a primary initial filter. Four large companies that could have something to value, in order of their price/sales ratios, are:
Corning (2.55x)
Intel (2.49x)
IBM (2.15x)
HP Enterprise (0.78x)
HP Inc (0.64x)
I am sure that there are others, and they should be researched.
Subscribers: Please share your thoughts and suggestions. We unfortunately will have some time before we select new holdings to new heights. However, it takes a lot of time to get to know new names and get comfortable with them, after what may be an unhappy period.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2022/02/building-long-term-investment.html
https://mikelipper.blogspot.com/2022/02/changing-focus-in-changing-world-weekly.html
https://mikelipper.blogspot.com/2022/01/things-are-seldom-what-they-seem-weekly.html
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A. Michael Lipper, CFA
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