The Most Dangerous Message - Weekly Blog # 837

 

         

Mike Lipper’s Monday Morning Musings

 

The Most Dangerous Message

 

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

   

 

       

The Most Dangerous Message is one ignored. It appears most institutional and individual investors are doing just that and are being rewarded for taking increased risks. The worst one can say about a professional is that they were unaware of a potential problem. Almost every major disaster has had a tiny preview of a small event/planned rehearsal, or a curious outsider identifying a possible future action.

 

I recently noticed the following observations pointing directly to a future major decline in market prices. The observations are in no special order. Most important at this level of analysis is whether the expected coming recession is secular or structural. A structural recession is usually driven by the mistakes made by those in authority reacting to a secular recession, who then turn it into a structural recession as FDR did.

                  

 Observations That Could Predict Problems

1. Deere reduced its full year outlook due to soft demand for farm equipment. (In the 1920s many sectors leveraged their capital equipment expenditures. The farming sector was the first to “top out”. This caused many local farm banks to fail, which in turn strained regional bank resources. Today the farm sector is a much smaller percentage of GDP, and banks are better reserved. I wonder if AI expenditures could run ahead of derived revenues today, and more likely in the future.)
2. We are in a phase where numerous CEOs are being replaced. Others will likely follow, with many of the replacements wanting to establish themselves as effective change agents. This translates over time into massive spending. This week a new CEO of Vanguard was announced. Based on his history at BlackRock and a prior period with McKinsey he is likely to be a spender. The risk is that some of his new efforts, at least in the earlier years, will not be cash positive. JP Morgan Chase will likely be finding a replacement for Jaime Dimon’s twin roles. I wonder if the board will initially give her/him the same latitude Jaime earned. While Greg Abel has been promoted to the number two position at Berkshire Hathaway, he is much more an operator than Charley Munger, the former great number two. I suspect the new number two will move up to CEO, pushing some of the more than 60 chiefs of the operating companies to be more aggressive. While Goldman Saks’ stock is flying this year, the number of senior partners leaving suggests they are not a totally happy shop. It would not surprise me if David Solomon was to divide both the Chairmen and CEO positions within 5 years. (The securities of these companies are all owned for clients and personal accounts). While it is never wise to attempt to copy a successful investor, one can learn from some of their actions. Warren Buffet, an enthusiastic investor in Apple*, cut some of the number one holding in his portfolio. He is afraid of a sharp increase in capital gains tax rates and is not alone in having this concern. Others are additionally worried about income taxes, death taxes, and corporate taxes. Chris Davis, the CEO of Davis Funds, recently sold a portion of the group’s largest holdings, mostly financials. (I briefly worked for his dad when we were both at the Bank of New York). * Owned in personal accounts
3. This week there were approximately 3 times the number of index puts than the prior week, while the volatility index (VIX) was roughly 60% of what it was a year ago.
4. Only one stock market index fell out of the 32 indices produced by S&P Dow Jones, the UK Titans 50 Index. It only fell 0.30%.
5. The spread between the best and worst performing indices was much narrowed than usual, +2.97% vs -058%. Not much of an opportunity to successfully trade in what was thought to be a good environment after the indices hit record levels.
6. Industrial products prices on a year-to-date basis rose +5.66%, while employment cost gained +4.83 %. Perhaps the next stop is somewhere between the two.
7. According to the WSJ, since 2020 teachers have become more lenient, allowing grades to rise at the very same time test scores were dropping. This could be a contributor to productivity falling and the inability to find qualified workers. The military is also struggling to enroll needed forces.
8. China’s economy is rising at roughly twice the US rate.
9. Moody’s noted that opportunistic issuers took advantage of tight credit spreads. I wonder if rates rose while real fundamentals fell.

 

Please share the observations you think are important.

Notice to subscribers

Next week’s blog will be produced on Memorial Day.

 

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

Mike Lipper's Blog: Trade, Invest, and/or Sell - Weekly Blog # 836

Mike Lipper's Blog: Secular Investment Religions - Weekly Blog # 835

Mike Lipper's Blog: Avoiding Many Mistakes - Weekly Blog # 834

 

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.