Mike Lipper’s Monday Morning Musings
Head Fake, Unrecognized Opportunity,
or a Minsky Moment
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
Searching For
Direction
Because low US stock
market transaction volume immediately followed the attainment of a new bull market
milestone, the media proclaimed we had entered a so called new “bull market”. I wonder if
it is true. I believe it is either a head fake, an unrecognized opportunity, or
a Minsky moment.
Those of us who have
watched or played competitive sports are familiar with a team’s attempt to
mis-direct the opposition by using a well-timed head fake to draw the
opposition into a perilous position, leaving them out of position to defend
against a scoring opportunity. The media proclaimed we entered a new bull
market following the S&P 500 exceeding a former high point. The transaction
volume since then has been quite low. More to the point from my perspective,
the NASDAQ Composite is still 17.6% short of its November 19th,
2021 peak. The reason this is significant is that for some time the tech laden NASDAQ Composite Index has been the leading performance index.
Another
interpretation is that it could be an unrecognized switch in performance
leadership to the S&P 500. Supporting this view is the proportion of
declining stocks vs total stocks traded being considerably lower than it was last
week for the NYSE (1.9%) vs the NASDAQ’s (4.6%). Byron Wien is reported to have pointed out that it
took 3 years to recognize the market hitting bottom in 1982. There is a similar
slow recognition that we have entered a new bull market with a new leadership, which might include financials, transportation, energy, and materials. This could be
the reason one of the stocks I own and hold in managed accounts (Berkshire
Hathaway) was the leading dollar volume stock traded this week. It is an owner
of these kinds of companies.
There is a third
possibility, the entering of a so-called Minsky moment of a dramatic change. In
looking at the movements of the market I look to the expertise of the management
of mutual funds. In so doing I look at the data from my old firm, now marching
under the banner of the London Stock Exchange Group. In its weekly data through
Thursday night, I noted a statistical relationship. In a number of peer-groups the asset weighted
performance was materially better than the median performance in the peer
groups shown below:
Average 2023 Performance
through 6/8/23
Peer Group Asset Weighted Median
Large-Cap Growth 13.61% 10.28%
Growth 14.54% 10.36%
Global 8.47% 6.52%
There are probably
two reasons for the consistent gap between the weighted and median performance.
The first is the substantial holding of at least 6 of the 10 biggest stocks in the larger funds in the peer groups. Second, the absence of floor specialists and trading capital on major
trading desks has impacted liquidity.
If we are entering a Minsky moment it is
conceivable that leadership could change dramatically from large to smaller
market capitalization stocks. Just this week the leading mainstream peer group
was Small-Cap Value, which on average was up +7.31% compared to +3.23% for all
stock funds.
Other Considerations
1. One of my worries about the current
period is that the gains have tended to be small. The problem with small gains
is that errors or other problems can wipe them out unexpectedly. During the
first quarter the S&P 500 essentially broke even. More frightening is that
analyst project a decline of -5.4% in the 2nd quarter. They expect a
3rd quarter a recovery of +1.7%, with a +9.0% gain in the 4th
quarter. Considering the number of errors reported in many sectors and
companies, I fear these mistakes may wipe out many of these numbers.
In the past many of these mistakes would have been caught by supervisors.
Unfortunately, many supervisors have
voluntarily left or have been pressured to leave. Some misguided managements
see the lower compensation paid to younger workers as improving margins. However,
the higher margins don’t consider the inexperience of the new workers. Some
managements prefer inexperienced workers who do not bring up delaying cautions.
(We see this on some trading desks.) While employees who switch jobs often get
twice their normal compensation raises, these pay increases are now declining at twice
the rate of the increase paid for workers to stay.
2. Regardless of whether an investor owns
a Chinese stock, he/she is impacted by the second largest global economy as a consumer of low-priced imports from China or as an employee of an exporter to China. To the extent the US restricts its
dealings with China for political reasons, other countries may choose not to.
We invest globally, both in terms of making money for our accounts and also
to hedge some of our domestic investments by owning some Chinese stocks competing against China. At this
point in time, I believe every American should follow activities in China.
Headlines from China
- The substantial unemployment in the 16-24 age group. I suspect many of them are better educated and disciplined than our own youths who don’t have similar attributes.
- Second and related is the expressed view of the Chinese equivalent of our Secretary of Defense who said that a war with the US would be disastrous for them. This removes the European approach to people out of work.
3. People at the top of the US financial ladder have some of the best investment and tax advice money can buy. I find it instructive that the top 0.1% have substantial amounts invested in haven partnerships and individual haven securities. The next 10% have very little in haven partnerships, but a lot in individual haven companies. I suspect those at the very top are concerned about preserving their wealth for others. While they fear inflation, they are more concerned about taxes. Perhaps we should be thinking long-term?
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