On The Way To Casualties & Eventually Riches - Weekly Blog # 918

 

 

 

Mike Lipper’s Monday Morning Musings

 

On The Way To

Casualties & Eventually Riches

 

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

 

Current Situation

In the fog of the latest week there were a few possible clues of changes and pronouncements.

• In November, US manufacturing activity contracted for the 9th month.
• After Friday’s close, an emerging market fund rose +4.99%.
• The value of the US dollar has fallen -6.16% year-to-date.
• Financial Times headline: “Wall Street expects double digit gains next year”.
• Apollo provided a glossy wrapper to the weekend Wall Street Journal, titled “What if the old financial playbook is costing you?”
• The Trump boom is comparable to past expansions, but not yet as big a percentage gain of GDP as the railroad boom of the 1880s.

Each of these bullets point to possible clues for the future, which should be examined by long-term oriented investors and their managers, as this blog will attempt to do.

 

The search for Investment clues

• While we have become a service-oriented economy with high dependence on the skills and attitudes of workers, politicians focus more on the manufacturing sector which has more unions and workers paying real estate taxes and buying lots of local supplies. Thus, manufacturing jobs are more important in Washington than in NYC. I suspect the re-shoring of manufacturing will probably be more automated and will have less employees. Consequently, office holders need to worry about ’26 and ’28.
• The real purpose of announcing tariffs was to force meetings with economic leaders to reduce non-tariff trade barriers. This has led to numerous currencies dropping more than the US dollar. (In my view, this is the wrong way to create more prosperity. We should be raising interest rates, so we are able to absorb the likely increase in bad debts, particularly those held by private capital. Higher interest rates will also raise foreign exchange rates, encouraging foreign lands to utilize more of our exports. A richer world is safer and better for us than a poorer one.)  
• The “street” is predicting at least a 10% gain next year. This year the median US Diversified Mutual fund produced a year-to-date gain of +12.55% and an annualized gain of +10.12% for the five-year period, this is at least 2-3% better than the expected net income gain. The difference is the result of other income and stock buybacks. Currently, public polls suggest investors are not happy with the results.
• Bankruptcies are increasing, particularly in non-listed companies. Private capital raises money to invest in the equity of these companies or to buy parts of public companies. Some of the private-capital is sold to investors as an income producing asset, which often requires a periodic sale of some of their assets. In some cases, this has proven to be difficult because some of their holdings experience difficulties. (While there is some trading of assets between privates, the remaining assets need to be sold to listed companies. This may resemble the old game of musical chairs, where one or more of the ‘safe’ chairs are removed after each round. The remaining chairs will be purchased by the public market, so the private market is dependent on the public market in the end. My concern with regulators encouraging retail investors to put some of their retirement money in private vehicles is that they will be buying into troubled situations.)  
• The comparison of the “Trump Expansion” with the railroad expansion of the 1880s could be accurate. It was a period of speculative, and in some cases fraudulent activities. Many new issues came to market competing with existing firms, which led to price wars and consequent bankruptcies. The era ended when JP Morgan and others recognized that too much competition was ruinous, resulting in rigorous rounds of mergers. Much money was lost and many communities lost rail service.

 

Conclusion

We have entered a globally different world. Investors need to study carefully and invest for the long term, periodically choosing not to invest.

 

Thoughts?

 

 

 

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Mike Lipper's Blog: Was it the week that wasn’t? - Weekly Blog # 917

Mike Lipper's Blog: Recession/Depression Risk Assumptions - Weekly Blog # 916

Mike Lipper's Blog: Risks Are Rising Thru the Clouds - Weekly Blog # 915

 

 

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Was it the week that wasn’t? - Weekly Blog # 917

 

 

 

Mike Lipper’s Monday Morning Musings

 

Was it the week that wasn’t?

 

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

 

 

 

Does 3 ½ US Trading Days make a week?

The bullish media and “street” pundits were thrilled that the 3½ day trading week restored early November losses to the popular stock averages, although they were disappointed the rise did not breakthrough to new highs. Looking at the results, they resembled a week from a younger bull market.

 

Reality may have been the problem

At least one analyst calculated that if you eliminated all “AI” related activity since 2019 “the market” is probably down. This suggests that since 2019 we have experienced a slowly declining bear market. The Conference Board’s measure of confidence recently dropped to 88.7%, which was more than the expected reading of 93% and the prior reading of 95.5%. HP, the old equipment producer part of Hewlett Packard, joined many other large employers in announcing expectations of a 10% job cut. The American Association of Individual Investors (AAII) sample survey for the last three weeks reported bullish projections of 32.0%, 32.6% and 31.6%, respectively for the next six-months. Their bearish projections remained in the 40-49% range.

 

Regular subscribers to these blogs have learned of my concerns about the declining quality of balance sheets, a warning sign of economic turmoil. One measure of this is the much larger growth in volume on the NASDAQ vs. the “Big Board”. In the short Friday trading session, the decline in volume on the NASDAQ was twice as large as the percentage decline on the NYSE.

 

Two Causes of Economic Turmoil

As with the runup to the 1929 crash, the Roaring Twenties led to overconfidence (AI?) and unsound leverage (Private Capital?). The organizational hollowing out is causing an increase in execution risk. Governments, universities, businesses, and families reacting to increasing financial strain are looking to improve efficiencies. Efficiency, not effectiveness, is measured by output vs input. Many have assigned revenues or other outputs to those at both the top and bottom of the production ladder. The people in the middle, mostly supervisors/middle management, have not been credited with the output assigned to those at the top and bottom and have been reduced or eliminated entirely. One glaring example is the federal government, although this trait is found throughout society. The President has had difficulty getting many of his actions approved by the courts. In numerous cases there was insufficient careful staff work, which would have phrased efforts better or would have raised internal discussion instead of simple loyally in attempting to execute flawed orders. This is a pattern exhibited in other organizations.

 

Thoughts?  

 

 

 

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

Mike Lipper's Blog: Recession/Depression Risk Assumptions - Weekly Blog # 916

Mike Lipper's Blog: Risks Are Rising Thru the Clouds - Weekly Blog # 915

Mike Lipper's Blog: The Inevitable Recession - Weekly Blog # 914

 

 

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Recession/Depression Risk Assumptions - Weekly Blog # 916

 

 

 

Mike Lipper’s Monday Morning Musings

 

Recession/Depression Risk Assumptions

 

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

 

 

 

 Future Probabilities

One intelligent betting task at the New York racetracks, where I learned basic analysis, was to guess the rough size of the gap between the betting pool odds and the probabilities. Only if the self-assessed probabilities were significantly larger than the crowd-determined payment odds, was it a sound wager. I try to apply the same approach to investing in stocks around the world. The easy part is determining the payment odds, which are based on two factors. The popularity shown in the market and guessing the quality of the current stock bulls, which is much more difficult. In general, more retail buying equals lower quality. This is not to equate brains with capital, but the amount of research done. There is an inverse correlation between the amount of media pundit space devoted to an investment and the probability of them being correct. That is not to say the pundits are dumb, they are limited by space and time and that limits their ability to handle complexity.

 

Determining probabilities often rests on the number of separate supporting elements. This is difficult because unpopular views normally have fewer supporting elements and are more complex. (If this happens then that will happen or at least improve the possibility of it happening.)

 

I have found that a search of history is useful in searching for probabilities. As there are no axiomatic rules, sometimes something will happen and sometimes it will not. The trick is to try to understand what caused the different outcomes. In dealing with history, we are lucky to have both written and geological records from around the world. From those records it is apparent there are similarities in what drives many critical trends, no matter the place or time-period.

 

Causes of Recessions

No one wishes for a recession, although we should expect one or at least the possibility of one. When a recession does occur, it is generally a surprise, and most are unprepared for it. In the beginning most don’t recognize they are experiencing a period of decreasing ability to make purchases and the ability to promptly pay debts. Hopefully, the economic community recognizes it soon after the nadir of the recession. The academic community only declares “official” notice of a recession after full recovery of lost resources.

 

In every recession I have studied, the critical realization of being in a recession occurs when the level of current earnings makes it difficult or temporarily impossible to repay what is owed on time. The squeeze on repayment is caused by an overly optimistic belief in current earnings and the absence of sufficient reserves. These conditions in turn are caused by imprudent personal, business, non-profit, and government decisions. Other causes are sloppy executions, which cause incomplete and wrong actions. Greed also drives actions without regard to consequences. There also appears to be an increase in fraud during a recession.

 

Causes of a Depression

Depressions are relatively few but longer lasting. For the most part they are caused by attempts to structurally pull the economy out of a recession. Typically, the leader of the government sees that the problems facing society are structural and immediately seeks to fix the problem.

 

In the US we have had four activist presidents who wanted to structurally change how we operate. These are Andrew Jackson, Thedore and Franklin Roosevelt, plus the current occupant of the White House. These leaders attempted to change many things but ran into opposition from the minority who used the Constitution and courts to block the changes. In addition, their actions created other problems for the country and globally after their terms.

 

Curren t Conditions

The following elements suggest there are problems ahead. My lens is primarily fixed on market analysis, not economic analysis. (This is due to belief that the market is primarily focused on the perception of future markets and not how past economic data impacts it.)

• For the past 2 weeks there have been more declining than rising stock prices on the NYSE and NASDAQ.
• For the last two weeks, the AAII sample survey shows only 32.6% and 31.6% bearish for the next 6 months.
• Tech stocks listed globally fell last week.
• Only 25% of weekly prices reported in the Saturday Wall Street Journal rose, the remaining 75% declined.
• Last week through Thursday, my old firm reported that only three mutual fund peer groups out of 104 competitive leagues showed average gains - Dedicated Short +7.80%, Health/Biotech +0.98%, and Indian Regional +0.55%.

 

My Working Wager

Between now and next Presidential election, the odds on a recession are 60%, with the odds of a depression before 2035 at 50%. (Remember the market rises about 80% of the time.)

 

Your thoughts, please.

 

 

 

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

Mike Lipper's Blog: Risks Are Rising Thru the Clouds - Weekly Blog # 915

Mike Lipper's Blog: The Inevitable Recession - Weekly Blog # 914

Mike Lipper's Blog: Biggest Investment Hurdle: Complexity - Weekly Blog # 913

 

 

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Risks Are Rising Thru the Clouds - Weekly Blog # 915

 

 

 

Mike Lipper’s Monday Morning Musings

 

Risks Are Rising Thru the Clouds

 

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

 

 

 

Overview

There does not appear to be a clear unified picture of the near-term future for the next couple of years. In examining a number of separate and distinct elements, each with their own limited cloudy outlook, I see a growing level of disconnected risks. Hopefully our intelligent subscribers can sense a positive future and share it.

 

Topics of Concern (In no meaningful order)

• The price of gold and crypto elements are rising, with the exchange value of the dollar falling more than 10% earlier this year. For centuries the single greatest attraction of gold was at the coin level, with the ability to bribe one’s exit from one country into another. Today, I am unaware that this is a major demand contributor. The Central banks appear to be the largest buyer, replacing some of the depreciating value of their large dollar holdings. While that might serve a few countries well, there is not enough gold in the world to fill all needs at any reasonable multiplier of current gold prices. Crypto also seems to be potentially price limited. At the moment I do not see any move by major countries to be a substitute replacement for the dollar.
• While the Chinese currency is now the third most used currency for world trade, I do not see any willingness of that government to use its currency for anything beyond its own trading. They do not want their currency to trade freely and absorb the turmoil of other countries.
• I do not see crypto as an alternative in size, particularly if it is US dollar based. Both gold and crypto don’t have a large industrial use, unlike silver to some degree.
• One possible substitute for the dollar is copper, and possibly some other base metals. One new problem for Dr. Copper is the expected increase in use by “AI”. It is interesting to note that Base Materials (Metals) were the second best performing mutual fund category in the current week (+4.44% vs -2.70% for the worst fund category Global Science & Tech.)  It may be worth noting that the ECRI industrial price index went to 115.50 from 114.80 the prior week, even though it does not normally move much.
• A significant number of casualty insurance companies have invested in private debt vehicles with limited liquidity.
• The weekly 6-month forward looking AAII sample survey found only 31.6% bullish and 49.1% bearish compared to three weeks prior, where the readings were 44.05% bullish and 36.9% bearish.
• In the current week there were more decliners than gainers on the NYSE and NASDAQ.
• A number of economists have noted that the top 10% of the population, often over 75 years old, own 50% of US wealth. The bottom one third, those who are 35 years old or younger, own 10%. (This may well explain the results of the only two governor elections this year.) This formation is being called “K shaped”.

 

I appeal to our readers to contribute your good thinking regarding the importance of these elements and to let me know how it affects your view on the global stock and money markets. 

 

 

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

Mike Lipper's Blog: The Inevitable Recession - Weekly Blog # 914

Mike Lipper's Blog: Biggest Investment Hurdle: Complexity - Weekly Blog # 913

Mike Lipper's Blog: Signals of Change in Historic Patterns - Weekly Blog # 912

 

 

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The Inevitable Recession - Weekly Blog # 914

 

 

 

Mike Lipper’s Monday Morning Musings

 

The Inevitable Recession

 

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

 

 

 

Loses Are Needed

Securities analysts, portfolio managers, investors, politicians, and others, need the fear and reality of recessions. Both written and geological history record meaningful and painful declines. Since they happen with some regularity there must be a repetitive set of reasons, with the lure of a gain sucking us into overexpansion and other error-making decisions.

 

Humans evolved from hunters and/or gathers, who periodically generated supplies beyond their immediate need, beyond a limited reserve for emergencies. When they gathered too much, costs grew and quality suffered. In the financial world we hoard and or borrow too much in the way of financial assets. This became increasingly clear as conditions changed.

 

These adverse conditions are clear in recorded history, in Babylon, China, and other places. Thus, the history of weather, business, and political cycles were written, becoming critical drivers of financial markets.

 

The Rise of Financial Analysis

Trading markets began soon after communities were established. Over time, it became clear that some successful traders achieved periodic, large returns on their use of trading capital. A number of these people gained reputations as good traders and found other people who recognized they did not have the same skills, contacts, and capital. These traders could borrow money at attractive rates and could charge fees to manage portfolios for selected outsiders. A number of these traders evolved into investment banks, who had both skilled traders and statisticians, some of whom became analysts.

 

US and UK Governments vs. Fraud

When markets fall, investors don't blame themselves for the losses they sustain. They claim fraud on the part of the "system", which includes issuers, exchanges, underwriters, and salespeople. Generally, the public investor does not understand business and financial cycles or chooses to forget the warnings that were given before they placed purchase orders. To protect the "public", disclosure and other laws were passed. While no law or regulation can prevent bad judgement, disclosures can ensure investors receive what is required to be transmitted to them. Unfortunately, accounting and legal disclosures use terms that the public does not understand.

 

As a result of large losses sustained by US public investors in the 1930s, there were seven reform laws passed, including the Securities & Exchange Act and a similar set of regulations in the UK.

 

The Development of Securities Analysis

While there were numerous books written about investing prior to the 1929 crash, they were not read by many investors. In the early 1930s Benjamin Graham and David Dodd wrote a Securities Analysis textbook for a Columbia University course. (Ben was a portfolio manager and Dave Dodd was a professor, who was still teaching in the late 1950s when I took the course from him.) Their main lesson was how to think about investing in securities while minimizing losing money. The course was taught as a supplement to a number of accounting and business law courses. They largely used the reconstruction of financial statements to assist patient investors. (While useful in minimizing investment losses, creating language to allow people to understand the thinking of others and the politics of an industry or client would have been more valuable.)

 

Recession Analysis

I believe most of those in the market are assessing the probability of an oncoming recession by focusing on published economic data. The stock market is focused on the future, not the past, and in that way it’s ahead of the economics releases. For example, the election results of last Tuesday suggest Louis XIV’s building of Versailles, even though no one else is saying it. The King was always at war, usually with England, and ran up big debts. He destroyed the local power of the nobility and insisted they spend most of their time attending to him in the Palace. (Is the reaction to larger than expected Democratic margins of victory in New Jersey and Virginia and the destruction of part of the White House for a big ballroom similar to what Louis XIV set in motion before the French Revolution and Napolean?)

 

Other market indicators last week included decliners on both the NYSE and NASDAQ being larger than gainers, with the NASDAQ losing twice as much as the gainers. NASDAQ's volume over the last year increased 38.21% vs the NYSE volume gaining 22.98%. (One of the clues to identifying a peak and then a decline is a decline in "quality", which is better evidenced on the balance sheet than through earnings.)

 

On Friday, the best performing mutual fund categories in rank order were Currency funds, Precious Metals Funds, Real Estate Funds, Natural Resource Funds, and Materials Producers. All are not heavily held by funds and other institutional holders. On a year-to-date basis, the only fund categories that beat the S&P 500 Funds Index category were Science & Tech, Precious Metals, Global Science & Tech, and Large-Cap Growth. (There is considerable overlap in the names in their portfolios). Barron's weekly list of foreign market indices showed 5 Asian markets up, with only 1 rising in Europe.

 

Identifying the date when a recession begins is officially only determined after it ends. As a practical matter you might use the purchasing managers' index, which has been in contraction for the last 8 months and is now showing only 42.3% rising. While it is foolish- to name both a market direction and a date, it may be useful to be aware that the market generally rises at least 80% of the time. Considering the 5-year average length of time CEOs remain in their chair, it suggests a market decline once every five years, which somewhat parallels the 4-year length of a US President's term. (I don't know how to adjust the number for the current President but possibly averaging all Presidents it may be around five years.)

 

Working Conclusion:

The odds of a recession before the next Presidential election is probably 67%, with a depression at 50%. (The latter would require some mismanagement during the recession to raise the odds of a depression above 50%.)

 

 

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Mike Lipper's Blog: Biggest Investment Hurdle: Complexity - Weekly Blog # 913

Mike Lipper's Blog: Signals of Change in Historic Patterns - Weekly Blog # 912

Mike Lipper's Blog: Where Are US Stock Prices Going? - Weekly Blog # 911

 

 

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Biggest Investment Hurdle: Complexity - Weekly Blog # 913

 

 

 

Mike Lipper’s Monday Morning Musings

 

Biggest Investment Hurdle: Complexity

 

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

 

 

 

 

First Priority

An investment priority should be logging changes to your investment policies, although most investors do not maintain such records. To paraphrase the late and great Charlie Munger said that Warren Buffett was a learning machine. His point was, Warren benefited from the losses he sustained. He had an investment history of making very few repeated mistakes.

 

Most profitable investors also make relatively few mistakes, in part due to most mistakes forfeiting more opportunities than money. To avoid future mistakes, it would be helpful to have an insightful roster of mistakes. The real painful mistakes are repeaters.

 

Tools of Repeating Errors

Many repeating errors of judgement rely on an automatic mathematical response. For example, if “x” happens then do “y”. This is a non-thinking action. It does not adjust for changes in critical conditions that might impact the current situation.

 

On a very basic level, buying is different than selling. Investment buying is often based on market prices being wrong but are likely to change soon. The seller on the other hand believes in the relative attractiveness of a security that will shortly decline in price. In both cases the investor believes that he/she is ahead of the bulk of the investment market. These are the actions of someone who wants to be among the leaders.  This is in direct conflict with successful investors who prefer to be lonely and contrary to the crowd.

 

Understanding Complexity

Berkshire Hathaway (*) developed a system of categorizing new investment information into three buckets, “yes, no, too hard”. Berkshire’s advantage was structured on the combined experience of the late Mr. Munger and Mr. Buffett. This experience included knowledge of over 60 different companies they owned and the knowledge of various securities they previously owned or looked at for more than 100 years combined. Where most others saw complexity, they saw investment opportunity.

(* Berkshire Hathaway shares are owned in client and personal accounts.)

 

Can’t Avoid Complexity

In the modern global world, one cannot avoid complexity. However, with some hard work and experience you can reorder many elements into positives, negatives, and judgements to be determined. With this structure one can put odds on each critical item, leading to a preponderance of positives or negatives worthy of action.

 

An example of factors that surfaced this week in the media are shown below:

• Wall Street Journal Headline “Foreign Stocks outperform S&P…”. This could cause many US accounts to add foreign stocks and funds. However, the largest collection of stocks that Americans buy are multinational stocks listed overseas. In many cases the largest portion of these portfolios are invested in US operations, which is a negative if your purpose is to participate in European and Asian growth. (The same could be said about US listed multinationals with significant sales abroad. This includes Coca Cola, a large holding of Berkshire. The same could be said about Apple.)
• The Federal Reserve is concerned about a bifurcated economy consisting of technology and older companies. Both sides have significant foreign sales.
• This may be the wrong time for the proposed cut in bank supervision. Both banks and non-bank financials are increasing loans to lower-quality companies.
• While some believe oil is being priced attractively, natural gas prices are even more attractive. Also, Copper has historically performed better than gold.
• The “Buffett Premium” is disappearing just as insurance driven earnings are very strong.
• Cash in portfolios should be used in the short term, either as a basket to buy favored stocks or to reduce exposure to over-capitalized companies and increase return on equity.
• In latest week there were more declining stocks than rising stocks.

 

Each of the mentioned items could be attractive buy or sell opportunities, depending on one’s view.

 

What do you think?

 

 

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

 

Mike Lipper's Blog: Signals of Change in Historic Patterns - Weekly Blog # 912

Mike Lipper's Blog: Where Are US Stock Prices Going? - Weekly Blog # 911

Mike Lipper's Blog: A Good Time to Sell? - Weekly Blog # 910

 

 

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Signals of Change in Historic Patterns - Weekly Blog # 912

 

 

 

Mike Lipper’s Monday Morning Musings

 

Signals of Change in Historic Patterns

 

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

 

 

 

Past Trends May Not Predict Future

There are times when using an old playbook is dangerous because the game has changed.

 

Inputs of Change

1. China overtook the US as Germany’s largest trading partner (fear of US tariffs?).
2. Meta cuts 600 jobs in their AI division.
3. Market rally is being led by low quality.
4. Consumer sentiment fell to 53.6 from 55.1 the prior month
5. Home ownership 40% more costly than renting. Will it change?

 

Other structural questions:

1. Is political power out of balance? IBES estimates 3rd quarter eps to be 10.4% and net income 8.8%, which to use?
2. Will later marriages and down-sizing earlier reduce demand for homes?
3. Will China follow the US in reducing competition through merger or bankruptcy? (autos/paints/investment and commercial banks/private capital).

 

Will we change schooling into education of life and business skills to help solve our problems.

 

Disclosure:

My personal portfolio of domestic and international securities assumes some of the answers to these questions. I could be wrong.

 

 

 

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Mike Lipper's Blog: Where Are US Stock Prices Going? - Weekly Blog # 911

Mike Lipper's Blog: A Good Time to Sell? - Weekly Blog # 910

Mike Lipper's Blog: Risks: Recession/Cyclical, Depression/Structural - Weekly Blog # 909

 

 

Did someone forward you this blog?

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A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

Where Are US Stock Prices Going? - Weekly Blog # 911

 

 

 

Mike Lipper’s Monday Morning Musings

 

Where Are US Stock Prices Going?

 

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

 

 

 

Time to Achieve

The old rule for publishers regarding future projections is to never state both a target number and a date certain. However, the result of that warning is a relatively useless projection for planning current actions. Unfortunately, I have views on both the target number and approximate timing, although neither are precise nor tied together. In this blog I share my thoughts with the hope that some are of value, and our trusted readers will share what they think are reasonable answers.

 

As a racetrack trained analyst, I believe the odds favor the US stock market reaching a multi-year peak in the foreseeable future. Consequently, my grandchildren and great-grandchildren will likely see nominal gains in their assets long-term. Careful readers will quickly surmise that I must have mixed views regarding my children’s market wealth prospects. Their results will be heavily influenced by their controlled spending and financial diligence, and what they want to leave to their heirs.

 

Current Market Dilemma

Most of the time a single investment attitude drives market prices. Today, there are two dominant thought patterns. The first is enthusiastic buyers who largely believe the President is in the process of restructuring the economy and therefore society. However, he is at a disadvantage of having only loyalists support him. (Loyalists generally do not pursue details of potential execution problems or even try to identify them to reduce political, functional, and court issues.) They think things are going well.

 

The second group is reluctant to make decisive decisions in the market. The $8 trillion in money market funds is one measure of their non-acceptance of things going well. Cash or similar investments are both a repository for normal operating reserves and future buying pools.

 

Incomplete Evidence

• Tariff impact: Consumers 55%, importers 22%, foreign producers 18%, and 5% evaded. (I suspect until tariffs are removed consumers will pay at least 90% of them, either in aggregate prices and/or in quality/quantitative shrinkage.)
• While the media and uninformed public focus on the Dow Jones Industrial Average (DJIA) and New York Stock Exchange (NYSE) volume and prices, they are missing a critical change in stock market structure. The year-over-year share volume has increased 40.88% for the NYSE and 80.55% for the NASDAQ, effectively double. (To some degree the NASDAQ volume includes inter-dealer trades to restore trading inventory positions.) Sometimes the two markets act differently. For example, on Friday the NYSE volume of advancing prices rose, as did total volume from Thursday. However, NASDAQ activity was the opposite, with lower volume and more decliners than gainers. A larger measure of the market is the Standard & Poor’s 500 (S&P 500), which is very near an all-time high.
• In the weekly survey sample of the American Association of Individual Investors (AAII), the percentage of respondents predicting a bullish market for the next six months dropped to 33.7%, while those predicting a bearish market rose to 46.1%. Just three weeks ago the ratios were 42.9% vs 39.2% in favor of the bulls.
• The current market and political situation resemble those of the late 1920s, which led to both the recession and depression. Both started with an overall increase in debt at the individual and business level. This was particularly true in the politically sensitive farm community, which was suffering from a change in foreign demand for its crops. (This time it’s a Chinese decline in demand for soybeans.) Small and medium-sized banks were having loan payment problems, which then led to imposing tariffs on foreign products and services. The current Federal Reserve Board is very conscious of this history.
• Another parallel is certain foreign governments recognizing the relative weakness of America and taking advantage of the situation by threatening further actions. This week Ruth and I spent time with the leaders of the US Marine Corps University who are preparing for a future different than the past. Similar efforts occurred before WWI and WWII, suggesting investors should think about structural changes to their investment policies.

 

Building a larger cash opportunity reserve may make sense. What do you think?

 

 

 

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Mike Lipper's Blog: A Good Time to Sell? - Weekly Blog # 910

Mike Lipper's Blog: Risks: Recession/Cyclical, Depression/Structural - Weekly Blog # 909

Mike Lipper's Blog: Tactical Headlines Show Strategic Clues - Weekly Blog # 908

 

 

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A Good Time to Sell? - Weekly Blog # 910

 

 

 

Mike Lipper’s Monday Morning Musings

 

A Good Time to Sell?

 

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

 

 Selling is More Important

When an investor, distinct from a trader, asks me if they should sell some portion or all of their holdings, I first try to determine the critical time period in judging the results of the action. If one is persuaded by media voices the answer will usually be tomorrow or at the end of the calendar year. For me, it is when the money is expected to be needed. For example, for my newborn great grandchildren's retirement or the replacement of the new university dorm, it could be a 100-years. Another matrix could be the future low price point needed to protect future funding of a desired goal.

 

Regarding a future low price point, it is important to recognize that prices move in cycles. The important cycles can be labeled as seasonal, cyclical, secular, and structural. It is how I think of the latter part of last week’s drop in prices, where what I follow fell -15% to gains of +7%. To conserve your time and the blog's space I will comment on the year-to-date period for those impressed with media voices and include some other screens as well.

 

The first thing that hit me was the largest average gain of +15.94% in non-leveraged, diversified large growth mutual funds. These gains were driven by the biggest positions in technology stocks. However, they missed out by focusing on securities registered with the Securities Exchange Commission. After many years of SEC registered stocks performing very well, there were some foreign markets that generated much better performance multiples. The leading countries were Ghana +130.25%, Cyprus +94.75%, Luxembourg +74.8%, Greece +71.45%, Columbia +70.05%, Nigeria +65.1%, Korea +61.1%, South Africa +48.02%, China +32.85% and Chile +31.02%. Weekly Barron's performance charts showing 14 European and 7 Asian countries had 7 Asian and 4 European indices gaining. (As an analyst that has followed non-US stocks and invested in some, I believe this is a good time to examine these opportunities.)

 

Most Analysts Focus on Rising Stocks

I glanced at those stock prices not doing so well. For example, the Dow Jones Industrials (DJIA) and Dow Jones Transportation (DJTA) stocks fell -2.739 and -4.88% respectively for the week. Perhaps more importantly, their year-to-date performance results were +6.90% and -5.21% respectively. (This suggests the US goods economy is not doing well. Tariffs could be a problem. Freight movement is down for both the rail and truck business and may forecast Halloween and Christmas sales being behind earlier expectations.)

 

Down Prices = Opportunities

Three industry sectors are showing small declines on a year-to-date basis: Banks -4.26%, Insurance -1.64% and small companies -1.1%. Restrictions on all companies are the same, but small companies may be impacted more due to their staff size. To the extent the current administration reduces some of the regulatory overhead, it cou1d restore a competitive advantage to smaller companies. However, many restrictions on smaller financial and insurance companies appear to make it easier for new entrants.

 

AI, An Unrecognized National Problem

Some are beginning to comment on the absence of large profits from Artificial Intelligence companies due to lack of public discovery of relevant financial disclosure, so I will not. At a recent meeting hosted by the London Stock Exchange Group, one of their headline speakers noted that the challenge for the AI industry was to produce "more with less". It is well recognized that AI is taking over an unidentified number of job functions, reducing the need for human labor. Great! Where are these laid off people going to get jobs anywhere near similar wages? This could be a concern for future Administrations. 

 

The 4th Activist President

Just like Andrew Jackson and the two Roosevelts, President Trump is trying to solve various national problems by changing how they are handled. Some of these attempts will survive the Courts. What I am not seeing is how the restructuring of the economy will work. Looking at the aftereffects of prior activist Presidents, I suspect it will materially change the outlook for investments, something people are not currently focusing on.

 

I would like to know if anyone has any thoughts on what restructuring will mean to their investment orientation.

  

 

 

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

Mike Lipper's Blog: Tactical Headlines Show Strategic Clues - Weekly Blog # 908

Mike Lipper's Blog: Anticipation Pays; Deliveries May Not - Weekly Blog # 907

Mike Lipper's Blog: Selected and Casual Road Notes - Weekly Blog # 906

 

 

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 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

 

Risks: Recession/Cyclical, Depression/Structural - Weekly Blog # 909

 

 

 

Mike Lipper’s Monday Morning Musings

 

Risks: Recession/Cyclical, Depression/Structural

 

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

 

 

 

Fears

Recessions are a cyclical phenomenon, largely due to price and debt imbalances. They occur regularly within a ten-to-twenty-year period. Subsequent recoveries are usually as quick as recessions. Depressions are much rarer, leaving societies changed and altering the distribution of wealth and power.

 

Based on elapsed time the world is due a recession, which may have already started. Liz Ann Sonders of Charles Schwab points out that the US Government tracks the profitability of both public and private companies. In both the first and second quarters of 2025 earnings declined. She believes that when data for the third quarter comes out it will be below trend. This may be different than more publicly reported GDP results because the wholesale sector is absorbing the bulk of the costs of the tariffs which foreign exporters don’t pick up.

 

There are lots of private indicators of economic business troubles. One that has been around a long time is the production of boxes, which declined. A new one to me is the trading multiples on the sale of trucking companies, which I have been told dropped in the first half of this year. This is important because it not only indicates a decline in the demand for goods, but it is a signal that they are having difficulty getting experienced drivers. Many drivers are on expiring or expired visas, demonstrating the impact of tightening regulations on many business activities.

 

Below the surface other concerns are becoming more visible. One can’t avoid a discussion of what AI (Artificial Intelligence) will do for global industry and consumption. While a lot of money and talent is being spent under this rubric, there are still no identified profits or sales from its use. In a recent study by MIT, they found a low return on AI’s use. From an overall economic viewpoint, I have not seen a study showing if AI’s replacement of the work of people benefits society.

 

With relatively small changes in price and debt levels there will be a recovery from the recession. However, every couple of generations those responsible for curing recessions believe the quickest solution is structural, which society rejects over an extended period.

 

My Fear

We have all heard that history does not repeat, but rhymes. My fear is that we are generally following a pattern like the 1920s and early 1930s, which led to the Great Depression. (You’ll recognize the term depression more from the study of psychology than economics.)

 

The US has suffered numerous recessions, most of which were in the one-two year range. For a recession to become a depression there needs a force trying to fix how society and the economy work. Unfortunately, previous commanded decisions didn’t work and prolonged the impact of the recession. Over our history we have had four presidents who have tried to make meaningful changes to our society/economy: Andrew Jackson, Teddy Rosevelt, FDR, and Trump. Through executive orders and legislation these Presidents tried to change how people lived and worked but ran into significant opposition from the courts and elements of the business community. Because of the US’s market and military power, we have an impact on what other nations do. They either resist or go along with the strategy but will be impacted either way.

 

What should Investors do?

This advice is for long-term investors looking to make returns for future generations. Traders who invest to make relatively fast returns should follow the momentum of the markets, while investors should move slowly with portions of their wealth and responsibilities.

 

Each will be subject to the cyclical behavior of the market, world economy, and changes in needs. While a trader may guess correctly regarding cyclical moves and early structural changes, an investor should wait for some understanding of the major implications of the change and be willing to be wrong before being right.

 

Whatever discussions occur today, they will likely be different a year from now. Major differences will result from views on the 2028 election.

 

Odds

These are my analog thoughts that lack the precision of digital work, but that is the way I feel very early on Sunday morning:

• The odds of a recession before the next Presidential election appear to be 65%.
• In dealing with a recession, the odds of government converting it into a depression is 50%, although it may take longer. Human nature almost guarantees future recessions and depressions due to over expansion of debt and other unsustainable commitments.

 

As usual, please let me know what you are thinking.

 

 

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

Mike Lipper's Blog: Tactical Headlines Show Strategic Clues - Weekly Blog # 908

Mike Lipper's Blog: Anticipation Pays; Deliveries May Not - Weekly Blog # 907

Mike Lipper's Blog: Selected and Casual Road Notes - Weekly Blog # 906

 

 

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 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Tactical Headlines Show Strategic Clues - Weekly Blog # 908

 

 

 

Mike Lipper’s Monday Morning Musings

 

Tactical Headlines Show Strategic Clues

 

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

 

 

The Art of Successful Investments

The primary reason prices move is a difference of opinion, otherwise they would stay frozen at a given level. There are two causes for the move, information changes and different investment timelines. Two approaches cause changes – a shift in prices and a shift in thought process. Most daily price changes are reactions to other price changes, which causes “outer directed” flows in the trading market. The so-called “smart money” is buying. Less often, prices move due to recognition that the future will be meaningfully different than the present. Using military terms for these changes, we would refer to them as tactical and strategic, or in psychological terms outer or inner directed. As a practical matter, outer directed frequently changes direction as markets ebb and flow. In effect, they are trading.

 

In contrast to trading, inner-directed investors move when they perceive the future to be significantly different than the present, or possibly the past. They are not primarily driven by prices, but by changes recognizing a fundamental future change. I label this approach strategic investing.

 

Traders can make changes intraday or at other frequencies. Their focus is the ratio of winning versus losing. They enjoy being with the crowd.

Strategic investors on the other hand may have years or decades between actions. A strategic investor is often lonely, in that few if any see what he/she sees. The lack of a crowd, however, reduces the size of any losses. Their loss is missing another opportunity. 

 

The media and many pundits live on providing tactical information for trading, paying relatively little attention to strategic investments. The reaction to recent press commentary provides a strategic clue of the wider significance shown in parenthesis:

 

“Amazon plans to shut fresh grocery chain in United Kingdom after just four years” (Both Walmart and CVS have reached similar conclusions. In the case of Walmart, fresh groceries appear to be a critical loss leader to get customers for other products. CVS is trying to reconfigure their “drug stores” to have a smaller front, concentrating on drug and clinical services. I suspect there is an import pricing problem which will be addressed successfully somehow.)

 

“BMO is considering selling six branches” and “Citigroup to sell an interest in Banamex”. (Both Bank of Montreal and Citi recognize the old model of local branches being the center of a local community’s financial business. However, much of that exposure can be handled by phone or computer services, or an increase by non-bank entities. Banks are laboring under various restrictions where restraints are less likely to produce troublesome losses.)

 

“American biggest corporations keep talking about AI, but struggle to explain the upside” (I have yet to see a published estimate of new sales or profits generated. One clue to the problem is several AI providers taking all three CFA exams, with the best machines scoring 79.1% correct answers. Considering AI requires a previously printed available source, one wonders about the machine’s ability to think creatively in answering a question. Maybe the test creators were not as knowledgeable as they should have been. Furthermore, I know many CFAs who I would not hire to manage money for me today.)

 

“Poland restores China overland trade route.” (The article did not mention the rail link tying traffic from China through the mid-continent, including the now independent former Russian states. These states include Kazakhstan with possibly world’s largest deposit of Uranium and substantial amounts of oil. The rail link was closed to put pressure on Russia. When reopened, rail traffic can travel throughout central Europe and into Spain etc. We are in an era of expanding rail service in every continent. The recently announced merger of Norfolk & Western with Union Pacific creates the first transcontinental freight line. (The question on many investors’ minds is why Burlington Northern, owned by Berkshire Hathaway*, has not entered into merger negations with C&S to create a parallel transcontinental line. My thought is there might be potential difficulty with labor negations. On Burlington’s mile-long freight trains there are only two employees, an engineer and a conductor. There have been difficult contracts negotiations with the conductors. In addition, there have been similar problems with Berkshire’s airplane pilots in their private rental flight business. We were in London when their subway system went on strike for 5 days. In addition, New Jersey Transit is facing a rail strike. In both cases the employees received good wages for 38 hours or less of work.)

*Owned in managed and personal accounts.

 

Short-term Signals

• The University of Michigan consumer confidence sentiment survey for August dropped to 55.1% vs 58.2% the month before.
• In the latest trading week, the number of declining stocks was greater than the number rising.

 

Longer-term Worries

Readers will not be surprised to hear that I believe there is a lot of wisdom harbored within the mutual fund industry. There is a group of funds that were designed to accumulate money for retirement and to manage capital to meet needs in retirement. These portfolios were typically comprised of stocks and bonds. The stocks were meant to supply growth and the bonds some protection against periodic declines.  These funds are labeled Mixed Asset Target, with a specific year indicating the probable retirement year. Interestingly, something happened on the way to retirement. None of the fund peer groups meant to meet retirement needs prior to 2050 produced average returns above 14.25% year-to-date.  This suggests to me that we should consider a range of twenty-five to forty years for long-term investments. This means we should hold investments for a long time and only sell if conditions change and are unlikely to return.

 

 

International equities had 10 better peer groups, world sector funds and regional funds had 6 each, sector equity, global equity, and mixed assets had 5 peer groups each for a total of 37 peer funds groups out of over 100 tracked. Turning to local stock indices, there were 67 countries better than the US for the same period.

 

It may not be too late to add international exposure to your holdings. This would exclude funds investing in US registered stocks, as you would still be exposed to US dollar purchasing power risk.

 

As of Thursday’s close, there were 18 mutual fund peer groups in the US Diversified Equity Funds Super group. The best performer on a year-to-date basis was Equity Leveraged Funds +29.25%, with twice the gain of the second-place leader Mid-Cap Growth Funds +14.25%. Since borrowed money (margin) is not used by most mutual funds, I am excluding equity leverage funds for the following analysis. Treating 14.25% as a good performer, I wanted to see which super group categories were better.

 

Dollar Risk

One reason people feel poorer today than a year ago, even though their stocks and homes are hopefully valued more than a year ago. You must go to the shopping center to understand the real economics. Almost all clothes, if their quality is maintained, sell at higher prices. Fancy cars, if they are sold at your mall, will also be higher. When you go to the grocery store or fresh food counter, meat and fish of the same quality are higher.

 

If you dig into the financial statements of many providers who raise money from overseas, their costs have risen since a year ago.

 

You may feel poorer now, but you will feel worse in the future. What caused this to happen? Who did this to you? Well, we all did it to ourselves. We collectively wanted too much from our government. They met our needs, but since we did not want to pay full price for what was provided, the politicians of both parties borrowed in our name, creating ever larger deficits financed with higher interest rates.

 

For the next ten years I expect to double the money I pay to the government for income taxes, sales taxes, use charges, tariffs, and probably transportation costs.

 

What are your thoughts?

 

 

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

Mike Lipper's Blog: Anticipation Pays; Deliveries May Not - Weekly Blog # 907

Mike Lipper's Blog: Selected and Casual Road Notes - Weekly Blog # 906

Mike Lipper's Blog: Bad Comparisons Can Lead To Faulty Conclusions - Weekly Blog # 905

 

 

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 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.