Mike Lipper’s Monday Morning Musings
Pre, Premature Wish
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Motivation
After stripping away all the worries, details, and
paperwork, the critical mission for analysts and portfolio managers is optimizing
the capital of our clients, including their families. Despite our perceived
brilliance, it is much easier to accomplish this mission during a “bull market”
rather than a “bear market”. The biggest mistake and most difficult to recover from
is missing the beginnings of a significant bull market, which is very easy to
do.
Most of the time markets travel through various transitional phases:
- Early recognition by a few far sighted, but often difficult people.
- Growing acceptance.
- Almost universal acceptance, except for the worrywarts.
- Finally, the proclamation of a permanent condition.
As the inevitable bear market becomes visible the process
is reversed.
As it is difficult and dangerous to jump aboard an accelerating train, I prefer to board when it is marshaled in the yard. The difficulty of getting aboard requires an amount of brains, courage, and luck. That is precisely what I am attempting to do by focusing on conditions before travel begins.
Pre-travel Conditions
First, study past bull market journeys. Some start, but
relatively few amount too much. Why? It may be that the damage done by the prior
bear market was insufficient to get the necessary support. Additionally, the market
may lack reasonably competent management capable of selecting the right track
and able to keep the momentum moving in the right direction at increasing speed.
Enough momentum to break the friction caused by others, including one’s own
partners.
To start a bull-market you must first have been sufficient pain from the preceding bear market, with the ability to initially fund dominance over key doubters.
Today, there do not appear to be sufficient losses needed to be made up. However, for most of this calendar year there have been more shares sold at lower prices than bought at higher prices, both on the “big board and the NASDAQ. Most trading weeks there are more shares sold at lower prices than at rising prices, by a ratio of 4 to one. Buyers are labeled as accumulators and sellers as distributors by market analysts. Contributing to distributions are some investors moving out of dollar-based securities. The US dollar is in its fourth decline in fifty years. With the proceeds from their sales many investors are buying bonds, either for the first time or in quantities way beyond their habit. Others are investing in European and Asian stocks.
Currently, the risk of losing a little in bonds and stocks is probably close to being equal. As new fixed income buyers venture into higher risk paper, the potential exits for higher risk paper to generate greater loses in fixed income than for stocks.
The total global economy is slowing. Not only in sales, but also in profits as margins narrow due to government policies restricting profits. There is a tendency to lower perceived risks.
After an investor loses more than expected, there is often an emotional need to quickly recover those losses. This is the second wave of money that will be sucked into buying stocks in a new bull market, and so the cycle begins again.
As much as I want to participate in a new bull market, it is apparently premature. Consequently, we must husband our resources and work to find relative islands of improving profitability.
Thoughts?
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