Going to Where the Puck Will Be - Weekly Blog # 750

 

  

Mike Lipper’s Monday Morning Musings

 

“Going to Where the Puck Will Be”

 

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

    

 

  

Lonely Strategies Applied to Investing

Wayne Gretzky, the great Canadian ice hockey player, contributes much of his over 20 year playing success to skating to where the pluck will be, not where it was. He was betting on a specific change.

 

How much of the bet was based on his belief that his teammates would send the puck in a new and beneficial direction? Or did he believe the play would lead to the puck being hit in a different direction? I don’t know. Nevertheless, he positioned himself in a less crowded or lonely position.

 

In a career analyzing winning investment managers, one repeated characteristic is being early to recognize an investment opportunity and staying with that choice for an extended period.

 

The benefits of being early are two-fold:

1. Fewer competitors taking positions
2. Taking up less of senior management’s time (perhaps even more valuable)

 

Another advantage of being reasonably early is that the price paid is often in line with what a disinterested investor would pay. Likely reducing the size of the loss if the expected doesn’t turn out as hoped.

 

Two Current Possibilities

If one is to believe what is currently being written by many. We have seen the bottom of the US equity market, the rate of inflation is about ready to roll over, and the investor is about to be ushered into a new bull market.

 

All could happen. However, the responsibility of an investment manager is to examine views different than those which are popular. This examination could be a good exercise and might even be correct.

 

The June Bottom

Two and half months ago, in mid-June, the popular US stock indices fell to their low point of the year. The averages rose in July but were relatively flat in August, then started to rise again. The table below shows their low for June, their closing value on September 9^th, and their % change:

 

Index             June Low    Sept 9th  %Change

Dow Jones Ind.    29,888.78   32,151.71   7.57%

NASDAQ Composite  10,646.10   12,112.21  13.77%

S&P 500            3,666.77    4,067.36  10.92%

 

Traditionally, a bottom price is accepted when a subsequent decline is in the same range as the first bottom price.

 

Bottoms also generally occur after capitulation of an important segment of market participants.

 

Neither of these have happened yet.

 

Although the Atlanta Federal Reserve Bank is currently looking for GDP growth, Morgan Stanley and others are expecting declines for some large earners.

 

In past bear markets there have been short bursts of upward prices, often occurring after a period of declining prices. This leads to traders shorting the market. A subsequent sudden price rise would likely force traders or their custodians to cover their shorts.

 

September is a tricky month, as the outlook for the winter shopping season becomes clearer. With sparse inventory, the absence of salespeople in stores, and some weakness in advertising, I would be more comfortable with a confirmation the bear market is over.

 

Rate of Inflation is All Important

As a numbers cruncher I like the attention being paid to this abstraction of reality, but it is not the reality itself. I am much more concerned with reality than the number to the fifth decimal every hour on a screen.

 

For risk-aware investors the nastiest word in our language is leverage, yet it is the basis for all financial growth. After the Volcker Recessions and Global Financial Crisis people desperately tried to recover. Often using leverage in an attempt to generate larger returns.

 

We are well aware of the use of borrowed capital to make money. This is what most in the financial community think of when speaking of leverage. People don’t generally label sales growth and productivity as leverage.

 

Sales leverage comes from getting more profits out of sales, either through generating more sales or selling a product or service for more than its cost to produce. This is often called productivity.

 

We have stretched sales leverage to an unsustainable level, which combined with bad labor management has led to lower productively. This is one of the reasons I feel the world is going to have a recession, which when badly managed will lead to a depression.  

 

Google, one of our great tech companies, is hinting at job cuts. They are approaching the point of too many employees for the expected level of sales.

 

I am disappointed with the quality of people being processed through schools of all levels. This, combined with the reduction in the number of supervisory personnel and executives prizing political skills over leadership. These lead me to believe the problem is not the number people. The problem lies in having the wrong people in positions where they are not properly trained to lead even small groups, let alone large groups.

 

History demonstrates that it unfortunately takes long periods for societies to eventually address their imbalances and grow results successfully.  

 

Question of the week:

What are you going to do to make things better for those who depend on you?

 

 

 

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

https://mikelipper.blogspot.com/2022/09/i-can-be-wrong-weekly-blog-749.html

 

https://mikelipper.blogspot.com/2022/08/4-5-changes-disruptions-faulty-weekly.html

 

https://mikelipper.blogspot.com/2022/08/mikelippers-monday-morning-musings.html

 

 

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