Mike
Lipper’s Monday Morning Musings
Short or Long?
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018 –
A short or long recession
appears to be the critical question on most economically oriented people’s
minds. As is often the case with a popular question, it is the easy but wrong
question. The right question is, what impact will the soon to be declared recession
have on our future economy, society, and investments?
Historians typically find
an over-riding cause for the period between expansions. The declines that have
the greatest impact on future expansions are not primarily to reset price levels
but to address economic imbalances in society and focus on the critical forces shaping
the future.
When most people discuss
the future, they focus on the factors producing a result pleasing to them.
Currently, the popular view is that the recession will be short and shallow. Well,
it might be, but it’s appropriate for thinking people to consider at least two
major outcomes, and others.
I have no special
competence to divine the future but feel compelled to think about the
alternatives for our clients and family.
Short Recession
Favorable Indications
A market analytical tool that
has been around for more than one hundred years requires two Dow Jones stock
averages to be going in the same direction.
The question is whether
we have already not only entered an economic recession but are demonstrating signs
of a bottom.
The chart pattern of the
Transportation Average is showing early signs of a market bottom, with the
Industrial Average further behind in its chart development.
To me the Transportation
Average is a more reliable indicator of what is happening, with the Industrial
Average an indication of what investors think about the future.
I wonder whether the
current administration, like President’s past, will declare operating railroads
essential to national defense and step into what looks like a pending national
strike.
Industrial prices lead
wholesale, retail, and consumer prices. The JOC-ECRI Industrial Price Index
fell -3.14% this week and is down -9.29% year over year, with Oil, Copper, and Wheat
among the drivers.
On balance I am more
impressed with the trading skills of those using NASDAQ stocks, than those limiting
themselves largely to NYSE stocks. In the latest week, more shares listed on
NASDAQ rose than fell, 11.4 million vs 10.2 million respectively. The opposite
was the case on the NYSE, with 8.3 million rising and 11.2 million falling.
Traders are demonstrating
better timing than investors but not gaining as much.
Unfavorable Indications
Sloppy analysis uses
stock prices being historically attractive, with current prices and the last
reported earnings or estimates. The price/earnings ratio on this basis has
dropped to the long-term average range. Usually, a sign of value is when P/Es are
substantially below average.
Quite a few recently
reported earnings were substantially below prior estimates. As bad as these
reports were, I wonder whether they captured the deterioration of their
businesses. I have not seen write-downs of the values of their inventories due
to lower priced raw materials, the shift of customer buying practices to more
essential goods, or the slower payments of accounts payable.
As a publishing
entrepreneur I had to deal with some of the biggest financial institutions in
the world., They were slow payers. Meanwhile, I had to pay our people on time,
as well as our rent. I did not “factor” or borrow against our receivables as
the lenders would have discounted their value, even though they all eventually paid.
When we investigated
investing in troubled or bankrupt companies for clients, we discounted
receivables and wrote down both raw materials and finished goods inventory, as
well questioning the value of fixed assets. If we could find a going concern
buyer for which we ascribed value to the prospects not there, we attempted to
ascribe value to their hard-working and highly competent work force and good
customer relationships.
A recent Financial Times
article heralded the end of the easy to borrow money period, making acquisitions
more expensive and difficult to do. Plus there will be fewer opportunities for M&A
and IPOs
Each week The Wall Street
Journal list the prices of 72 security and commodity indices, as well as
currencies. In the latest week 75% went down.
Working View
The betting odds seem to
be against a quick, short recession, but it could happen. If it does happen, I
don’t think we will address the serious questions holding us back from our
optimum potential.
Odds are, if we have a short
and shallow recession, it will in time be followed by a longer and deeper recession
addressing some of our problems.
Unaddressed Problems
- The average US high school student ranks 37th in international rankings in math and science.
- The groups dictating to our medical system are tort lawyers and insurance companies, which is not conducive to producing the best healthcare for us.
- A declining military system more interested in social goals than possessing enough power and training to deter potential aggressors.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2022/07/time-to-be-contrary-weekly-blog-741.html
https://mikelipper.blogspot.com/2022/07/mike-lippers-monday-morning-musings.html
https://mikelipper.blogspot.com/2022/06/switching-prime-focus-weekly-blog-739.html
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