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:
- Fewer competitors taking positions
- 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 9th, 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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A. Michael Lipper, CFA
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