Mike Lipper’s Monday Morning Musings
Professional Worry Time vs Amateurs’
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Domestic Numbers of Concern
Recently, the three main stock indices reached record price
levels, causing a lot of electronic babble and printers to spill ink. While the
amateurs ate it up, the “pros” worried about different sets of numbers.
The worrying numbers came from the domestic fixed income
world, where risk-spreads (interest rate differentials) were extremely narrow. The
US Treasury spreads between 2-year and 30-year bonds narrowed to 32 points. I
have difficulty finding a scenario over the next thirty years where this is
appropriate.
Barron’s data allows analysts to look at a similar narrowing
between 10-year high grade bonds and similar medium grade bonds. Comparative yields
have narrowed to 44 basis points from 116 points a year ago.
What may be supportive of these concerns is the latest American
Association of Individual Investors (AAII) sample survey. The sample survey has
a good long-term record but is often wrong in assessing the outlook for the
next six months at turning points. The most recent survey shows 37.1% of the respondents
being bullish and 38.6% being bearish. (This is the first time in my memory
that the bears have been stronger than the bulls. The sum of the two estimations
equals 75.6% of the sample, reflecting the intensity of the views on both sides.
A normal distribution would be about 40%, 30%, and 30%.
International Concerns
Strange to say, not everyone in the world is as intensely focused
on the US stock market. There is a small group of activists concerned enough to
maintain active communication with the person who can disrupt the economy and
politics---President Trump. The fact that these “heavy hitters” find it necessary
to maintain contact is another risk investors should be concerned about.
Researching successful small companies internationally is much
more complex than doing it domestically. Many small companies are still
effectively private and are led by an entrepreneur. In many cases these organizations
cross borders easily, initially through industry contacts like many of our own
companies. Part of the skill set needed is identifying how the countries really
work. Families are much more important in mainly multinational countries.
Critical financial arrangements initially start with private sources. Most
small companies expect to be multi-generational, even though they can be bought
by the right large company at the right time.
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