Mike Lipper’s Monday Morning Musings
We are Never Fully Prepared
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
The Lessons of Saturday, July the 13th
One self-appointed mission of the weekly blog is to make subscribers
aware of potential negatives absent from the content of various media pundits and
financial sources. We are not predicting bad things happening but will offer some
contrast to the regular diet of “happy talk” from most other sources. In
evaluating the bulk of normal inputs, I think it is useful to consider the possibility that some things will not have happy outcomes.
Coming from my real educational experience at the racetrack,
where the most favored horses win more often than those with longer odds. The
betting returns on winning favorites are smaller than those of longer shots winning.
Consequently, a sophisticated bettor will often have a smaller win vs loss
record but will walk away from the track with more money by selectively picking
horses with higher odds. However, betting on every non-favorite usually produces
losses in aggregate.
To prevent such a result, one must be selective in taking high
odds bets and avoid improbable long shots. Thus, I was totally unprepared for
Saturday’s distressing news of an assignation attempt which caused two deaths, two
wounded, and most importantly the near death of Presidential candidate Donald
Trump.
As with many tragedies there are immediate losses and potential
longer-term impacts. Luckily there was just one immediate death along with two
seriously wounded casualties, as well the death of the assassin. Our hearts go
out to the innocents.
The longer-term implications are possibly numerous and far
reaching. Unfortunately, in America we have periodically had both failed and
successful assignations of prominent politicians. Hopefully, we can rid our
culture of these tendresses.
I do not know if the attempt on the President’s life will
have any impact on his choice for Vice President. Furthermore, we don’t know if
the American voters will change their choice for President this fall, or if it will
have impacts on our foreign friends and foes.
The impact on me personally will be to focus on the
possibilities rather than the probabilities in looking at the future.
Things that Could Change the future
- The results of the weekly sample survey of the American Association of Individual Investors (AAII) are viewed by some market analysts as a contrary indicator. I find it useful in gaging the short-term views of this group of smaller investors. (The survey occurred prior to the assassination attempt on Saturday.) The change in the bullish swing over the last two weeks was almost twice as pronounced as the bearish swing, 41.7% to 49.2% (+7.5%) vs 26.1% to 21.7% (-4.4%), respectively. Perhaps more significant, the bull score was more than twice as large as the bear score (49.2% vs 21.7%). This could be the result of a difference in the makeup of the sample participants. A difference of this magnitude is an extreme condition and is unlikely to be maintained.
- Too many investors believe the market can be understood by following the S&P 500, which is a collection of eleven industry groups that move quite differently from each other. Over the last ten calendar years the monthly low points of the eleven industry groups have rarely coincided.
- The number-nerds have great faith in US government compiled data. In an article in the NY Times, which regularly has errors. The Times produced an article with the headline “US Economic Data Integrity May Be at Risk, a Study Finds”. The article quotes a study by the American Statistical Association proclaiming the risk of future errors increasing due to government departments and agencies being squeezed by budget issues, particularly due to the lack of funding for research. I remember this problem well. In the early 1960s I was a junior analyst assigned to tracking the steel industry. I reported to the Director of Research who came to the bank as an economist from the government. One day I went to him and suggested the steel industry data was worthless in guiding investment decisions. “How could that be, it came from the government”. I suggested the eight companies in the data file were quite different. Some had to ship their products many miles to customers while others had very little shipping costs, causing large differences. Based on this factor alone those companies were better investments, Chicago over Pittsburgh. I consequently created my own subsector groups for selection purposes.
- The CEO of JP Morgan Chase was traveling on the day it released its quarterly earnings announcement. He usually participates and I felt his input could be more important than some short-term numbers.
Two Chinese Inputs Could Be Significant
- Chinese troops are holding military exercises with Belarus on the Polish border. (I wonder whether this could be the result of Finland and Sweden joining NATO, and possibly Ukraine?
- Later this month the Chinese are holding the 3rd Plenum, where the following topics may be discussed, with some yet to be determined:
a. Can officials restore faith in the economy?
b. How will officials look to forge China into a tech superpower?
c. Do foreign companies have a future in China?
d. How will China address growing geo-economic risks?
e. Can officials fix the government broken revenue model?
f. How will the Party respond to China’s demographic decline?
g. How will China try to manage the great transition?
Are you prepared for the pace and depth of changes?
Did you miss my blog last week? Click here to read.
Mike
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