Mike Lipper’s Monday Morning Musings
How Deep & How Long
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Concerns
Periods of low volume and relatively small moves are normally comforting and allow us to avoid making decisions. My biggest concern is that I may not see enough that is important and draw the wrong conclusions.
As a contrarian and entrepreneur, I am normally at ease being lonely or a minority in my thinking. This approach has worked out reasonably well for me and my clients. I am increasingly concerned that several others, including some well-known leaders, are voicing similar concerns about the future of global markets and economies. Could we be talking ourselves into a bear market and recession?
Tea Leaves
The following are very brief comments largely from one of the most erudite market research departments in our business, Bank of America Global Research, supplemented by other insights:
- The NASDAQ is up 11% from its May 20th lows, despite Brainard. (The Fed has flip-flopped back to hawkish), JOLTS were strong not weak, oil was up not down, there were CEOs pessimistic, Microsoft gave lower guidance, and Moody’s gave no guidance at all.
- Oil prices are annualizing a 108% gain, surpassed only in ’99 during the TMT bubble and during the ’74 oil shock.
- Will it be the Summer of Volcker, with the central banks just getting started and a “no fun” Fed till done?
- Popularity of corporate high yield by issuers and investors.
- Private clients want yield, quality, and growth defensives, in that order
- The Bank of America Bull & Bear Indicator moved to extreme bearish, the lowest signal since June 20. (Even though brokerage commissions are currently small, transaction activity is good for brokerage firms.)
- NASDAQ bears are ending as Quantitative Trading begins
- Global food prices were up 30% for the past 12 months. Housing prices globally are sharply higher. For many, the increase in the “value” of their home equals their annual working income. Inflation is rising much faster than wages. We have the highest ratio of vacancies to “unemployed”. (Remember, some with “off the books income” are counted as unemployed).
- Shadow banking’s strength through an economic decline can be questioned and may be expensive for the economy and borrowers.
- There are some who believe the bottom has already been reached and tested. (Doesn’t seem correct)
My review of Barron’s weekly data I found of interest:
1. While the number of shares traded on the NYSE and NASDAQ was similar, more shares were sold than bought for the week in each case. There was a distinct difference in the frequency of new highs and new lows on the two markets:
# New Highs #New Lows # Listed
NYSE 155 112 3611
NASDAQ 64 38 5470
As the NASDAQ attracts a greater percentage of professional speculators, one might conclude that the week’s volume was generated more from public investors and wealth managers than public investors directly.
2. This focus on the strength of the NYSE comes at the very time equal weighted performance indices are performing better than capital weighted. This is true for the S&P 500 and for 9 out of 11 sectors.
3. The weekly summary of the American Association of Individual Investors (AAII) survey is a contrary indicator of market turning points. This week’s survey moved away from its extreme readings to a more neutral position, 32%/37% respectively.
Mutual Funds
The weekly performance of mutual funds often describes the forces driving the US markets. The table below shows the only 4 fund peer groups which gained 5% for the week ended Thursday, along with their performance for the latest 52-weeks and 5 years:
Peer Group Week 52 Weeks 5 Years
Equity Leverage +5.92% -15.14% +5.62%
China Region +5.71% -31.07% +3.92%
Global Tech +5.66% -24.47% +13.42%
Science & Tech +5.46% -16.01% +15.15%
While the week’s performance leaders were close together, they were recovering from quite different depths. Additionally, the performance rank within group was a reversal of the performance for five years. This suggests short term performance is not indicative of long-term performance. I am a little surprised that the advantage of leveraged performance was not greater. The spread between the Global Tech Fund average and the more domestic Science & Tech Funds may be a function of the relative strength of the dollar, which is unlikely to continue indefinitely.
Important
The recent rise in the China Region reflects a recovery from Chinese lockdowns and an apparent change of attitude in Chinese political leadership. The last observation is worth following closely. We are seeing more tensions between President Xi and Premier Li Keqiang. There are several political factions within the CCP and most need to be allied with Xi for him to win an unprecedented third term. There will quite likely be some horse trading between factions, which may impact the attractiveness of investing in Chinese securities/funds, as well as in world trade.
Warnings
JP Morgan Chase and Goldman Sachs are the big leaders in global M&A facilitation and investment banking. Both the President of Goldman, John Waldron, and the Chair of JP Morgan Chase have issued warnings about difficult times ahead.
Inflation and Shortages
Evidently, we have been told there is disagreement within The White House and possibly some Cabinet members on how to address the rising level of inflation, believed to be caused by shortages. Some wish to stop price increases by lowering the demand bidding up prices. However, the way to lower prices is by increasing supply.
At least half of current inflation could be reversed by withdrawing our restrictive energy policies and by reducing tariffs to help our lower earning population.
Shortages beget other shortages and misplace consumer, industrial, and investment allocations.
Election Bet
While the 2024 Presidential election is two years away, it is an appropriate time to guess its outcome and impact on investment portfolios. The general view is the 2024 election will be a re-run of 2020. If it were to be, then my guess is the election will turn on the political skills of the Vice-Presidential candidates, who will do more of the heavy lifting. The bet becomes more interesting if only one of the previous two candidates runs, as he and his party will likely lose. My best guess is congressional and big city leaders have too much to lose and will force some changes.
If there is not much progress addressing US problems, whoever wins in 2024 will win a “poisoned chalice”, as most of their time and effort will be spent attempting to rectify leftover problems. As someone who has invested in turnarounds, I believe a reasonably complete turnaround will take at least five years.
From an investor’s viewpoint, this unhappy set of circumstances suggests the period will be marked by relatively low returns in the mid-high single digits. These results will permit many to retire carefully, but not with a cushion for emergencies or estates to pass onto children.
Please share your views.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2022/05/falling-confidence-beats-numbers-but-be.html
https://mikelipper.blogspot.com/2022/05/inconclusive-but-trending-lower-weekly.html
https://mikelipper.blogspot.com/2022/05/three-worries-april-near-term-slowdown.html
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