Investment Time Horizon Should Pick How You Measure the Results - Weekly Blog # 921

 

 

 

Mike Lipper’s Monday Morning Musings

 

Investment Time Horizon Should Pick

How You Measure the Results

 

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

  

 

 

Current Situation

Billions of people invest directly or indirectly in US securities markets, with each having somewhat different motivations and thoughts about what they are doing. Since we don’t know these people and the way they think, we simply group them into buckets. I have found the intended investment period often defines how they invest and for what period.

 

My outlook is of someone who has served families and institutions, and I tend to think long-term for them. As most money invested in mutual funds is largely for retirement and most institutions are designed to pay out their assets over an extended period of many years, they too have a long-term time horizon. (Unfortunately, this focus on the long term does not come with a knowledge of what the future will bring in terms of risks and rewards.)

 

The media concentrates on “news” and fills space with the current chatter about the present and the next expected announcement of note. Most security salespeople and money managers believe potential investors are primarily interested in the present and that is the focus of their sales pitches.

 

These two different focuses have led to two very different market structures. The hyper action-oriented players dwell on any market development that leads to a move in stock prices. They celebrate the percentage gains of interim results and prognostications. Those who use securities to meet future payments are concerned about anything that might reduce these payments in terms of future purchasing power. A possible tell-tale signal of a threat is the sale of securities by supposedly knowledgeable investors.

 

This is the tug of war between those seeking near-terms rewards and those worrying about the loss of worth of some future payment. To satisfy both camps the stock exchanges publish the volume of shares sold at higher and lower prices and the number of issues which rose and fell each trading day.

 

In the latest week there were only four trading days and one of those was half a day. On the last day the volume of shares traded on the NYSE was down by approximately 2/3rds and by approximately one half on the NASDAQ*. (In the current market environment, I pay more attention to the NASDAQ, as it has risen the most this year due to having more “Tech” companies, whose stock prices are more volatile than those on “The Big Board”. On Monday the 4 indicators were larger for the NASDAQ and on Tuesday the NYSE saw better results. This see-saw pattern has occurred frequently throughout the year.) For the week, 65 % of NASDAQ stocks rose in price vs 61% for the NYSE.

*Client and personal accounts own shares in NASDAQ.

 

In terms of looking at the future there were two interesting notices. The Conference Board Consumer Sentiment Survey was 89.1% vs 92.9% the prior month. The American Association of Individual Investors (AAII) saw a drop in bullish sentiment for the next six months in their sample survey, dropping to 37.4% from 44.1% the prior week.

 

Understanding the Measure

Most of the chatter about this change focused on the percentage change from the period immediately prior. However, there is another way to look at the results, the way an actuary would in determining the chance of a certain event happening. This is done by reviewing the entire history of the statistical sample, including any possible period where that event could reappear and at what frequency. For example, one chance out of fifty years, or every 84 months, or something similar. History traced through geological discoveries has recorded cycles of expansions and contractions with some regularity. It is much easier with regular barter or the development of money.

 

Said simply, when there is a shortage of supply over the level of demand, prices go up. When there is more supply than demand, prices drop. Climate also impacts agriculture, as does the effort of humans. The supply of money was a recent concern, which has more recently shifted to concerns about the supply of credit and certain natural resources. In all cases, it is the imbalance of critical items which moves prices to a point of excess, which causes a reversal.

 

Small reversals happen more frequently than large ones, often occurring within a single presidential term. However, small reversals periodically stretch over two or conceivably three terms. In trying to avoid or stop small declines, the application of well-meaning changes can trigger bigger declines, which we label depressions.

 

Addressing the economic hardships caused by the cost of fighting WWI led to an extended period of debt expansion, which initially hurt the farming communities. This led to the application of tariffs to protect small banks which extended loans to over expanded farmers and farm equipment dealers in critically important mid-western senate seats. Simultaneously, the public became enamored with the use of credit in an already highly priced stock market.

 

The market crash of 1929 caused many people to lose money in margin accounts, along with many of their brokers. The market reached a bottom in 1931, but people were scared by what had happened. In 1932 they elected FDR as President as a protector of the banks, and he closed all the banks in 1933 in an attempt to restructure society. Even though FDR lost most of his battles with the Constitution and the Courts, he initiated various government agencies that mismanaged the economy until we entered WWII, which he helped start in both the Pacific and Atlantic. The US recovered slowly after the war and subsequent Korean Conflict, although some stocks listed on the NYSE did not reach their 1929 highs until the mid-1960s with the discounted dollar.

 

Semi Parallels Today

There has been an expansion of debt both at the federal and individual level, with bankruptcies currently rising. At the same time, prudent constraints on the financial community have been reduced or eliminated. Additionally, we have an underequipped military, including Navy, Air, Space, and Coast Guard not ready for a multi-front war.

 

Conclusion:

We don’t know when the next decline will happen, or if the depth of the decline will morph into a depression. However, we should resist being fully exposed to rising gains in the non-public market while we experience a stagnant private economy. It is possible gains achieved in 2026 may be expensive in the long run, so be careful.   

 

 

 

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Mike Lipper's Blog: Tis the Season of Joy & Reflection - Weekly Blog # 920

Mike Lipper's Blog: Are Investors Seeing a Change? Politicos Are Not - Weekly Blog # 919

Mike Lipper's Blog: On The Way To Casualties & Eventually Riches - Weekly Blog # 918

 

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Tis the Season of Joy & Reflection - Weekly Blog # 920

 

 

 

Mike Lipper’s Monday Morning Musings

 

Tis the Season of Joy & Reflection

 

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

 

 

  

The Season

Around the world families and friends gather to exchange holiday wishes with those who are close to us, either in person or through electronic devices. We express feelings of goodwill, with the hope that all are happy and in good health. We often harken back to times of shared thoughts as we communicate with one another.

 

As we get older, we reflect on the progress that we and those close to us have made over time. It is remarkable how much success we have had and do not dwell on less happy periods we have passed through. Those of us who carry the investment and political bug lapse into thoughts about the unknown future, which will likely bring periods of happiness and sadness. As an addict of history, I know we will live through both types of times. My wish for all of our families and friends is that we continue to enjoy more good than bad periods, and most importantly learn from both.

 

Last Week was not of much help, or was it?

The first three trading days showed more losses than gains. The last two days generated advances that more than made up for the earlier losses. For the week there was a slight gain, leaving the three main stock market indices less than 3% from record levels. (For most of 2025 the S&P 500 traded in a relatively narrow band. Market analysts often believe this type of banded performance is the storing up of energy to either break up or down by a significant amount.) However, looking at the week as a whole, 50.8% fell on the NYSE and 60.1% fell on the NASDAQ. On the “Big Board” there were 233 new highs vs. 198 new lows, while on NASDAQ new lows were the majority, 554 new lows vs. 352 new highs. (Since the NASDAQ has risen more for the year, I believe it is a better guide to professional thinking, at least at the moment.)

 

What is more important?

All market analysis is about picking the expected period of ownership. Warren Buffet would like to never sell a stock he’d bought for Berkshire Hathaway, which is owned by us in client and personal accounts. (This may change a bit under the new CEO of Berkshire.) His approach is followed by other publicly traded family holding companies, who additionally own shares of Belgium, Canadian, French, Italian, and Swedish companies. (For the most part, all of these companies invest for the foreseeable long-term, which we try to copy.)

 

In looking at the long-term, we expect that stock prices to be cyclical, with some down periods. Most of these holding companies are buyers of stocks below their perceived long-term investment value. (We try to do the same.)

 

Applying this thinking to 2026

Having learned analysis at the New York race tracks I look for a wide gap in the odds posted, which measures the amount of money invested in each horse and the self-determined probability of each opportunity. When the gap is large it is worth a bet. Recognizing that in order to win I must overcome track fees, individual expenses, taxes, and racing luck. There is also a near certainty that on average I will be wrong (premature) on some individual bets, but right on monies bet and earned. When this logic is applied to investing in stocks and funds, I am very selective and very conscious of the investment environment. When the bulk of the crowd is betting considerable amounts of money in one direction, I don’t bet or at least bet very differently than the crowd.

 

Currently, the crowd believes stock prices are attractive and are expected to rise as they have for a number of years. However, each year that stocks rise reduces the probability of them rising in subsequent years. Considering the number of years of positive performance, the chance of a repeat is low. Especially when you consider the US election cycle, a bullish government reducing domestic constraints, Ukraine, Middle East tensions, an ambitious China, and technological challenges.

 

The one thing wrong with my outlook is the frequency of the number of declines over advances. There were some sellers in the late 1920s, one of which was my grandfather, to the benefit of his clients.

 

This may not be the time to be 100% in or out. What do you think?    

 

 

 

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Mike Lipper's Blog: Are Investors Seeing a Change? Politicos Are Not - Weekly Blog # 919

Mike Lipper's Blog: On The Way To Casualties & Eventually Riches - Weekly Blog # 918

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

 

 

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Are Investors Seeing a Change? Politicos Are Not - Weekly Blog # 919

 

 

 

Mike Lipper’s Monday Morning Musings

 

Are Investors Seeing a Change?

Politicos Are Not

 

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

 

 

 

Was the latest week instructive?

During the low volume week: the DJIA fell -0.51%, the S&P 500 fell -1.07% and the NASDAQ fell -1.69%. One does not know a trend is over until a meaningful reversal of direction has occurred, which quite possibly was the case this week. On the NASDAQ there were more decliners than gainers, unlike the “Big Board” where there were more gainers. However, since the April 8th bottom, the NASDAQ Composite Index has led the US general stock market, gaining +51.92% compared to +37.02% for the S&P 500 and +28.72% for the DJIA.

 

The supporters of the political party that currently occupies leadership in both chambers and the White House cheer these recoveries but appear to ignore other data. For example, real private non-residential fixed income investments, excluding data centers, have been flat since 2020 and is far behind 2023 prices.

 

The Real Problem is Bad Debt Creation

For the “bulls” to be proven right, a large portion of the public’s uninvested money must be corralled to invest in the economy, in sufficient amounts necessary to generate the tax revenues required to support government spending and address the growth of the deficit. Instead, they are doing this by removing the Controller of the Currency and the leverage lending guidelines of the Federal Deposit Insurance Corporation (FDIC), which they felt were too restrictive. To add more fuel to risk capital they are encouraging retail investors to put some of their retirement income savings into private debt investments, even though there has been an increase in bankruptcies over the last four years.

 

Economic Tailwinds

Optimist believe the economy should have the wind at its back in 2026 due to the following positive events resulting from the “Big Beautiful Bill”. However, it remains to be seen whether these events translate into additional stock market gains or if these events are already reflected in current market prices. Some of these events could also be negatively impacted by Supreme Court decisions on tariffs.

• A relatively large number of taxpayers will see tax reductions in 2026, with some seeing tax refunds early in the year.
• Reduced regulations should decrease the cost of doing business and speed up the introduction of products to market.
• The reshoring commitment of over $18 trillion in manufacturing capacity should boost construction and the jobs required for that task.
• AI capacity construction should continue throughout most of 2026.
• Energy capacity construction will likely increase in 2026, with the introduction of small-scale nuclear power and construction of a new natural gas pipeline from Pennsylvania to New York.
• The House of Representatives passed a $900 billion military budget, which includes pay raises and an increase in defense spending. This bill still needs to go through the Senate before it becomes law. Some of these funds will be used to retool the military for modern warfare, which includes increased use of AI and unmanned vehicles.

Various underwriters are predicting that equity markets will generate double digit rates of return. On a long-term basis this is extremely difficult to do and can only be achieved by accepting the risk of periodic losses. By year end the year the S&P 500 Index could see its third consecutive year of annual gains exceeding 20%. Only once, from 1995-1998, has the market seen a 4-year period of consecutive annual gains of 20%.

 

Bottom line: Be Careful

 

 

 

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Mike Lipper's Blog: On The Way To Casualties & Eventually Riches - Weekly Blog # 918

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

 

 

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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?

 

 

 

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

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?  

 

 

 

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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.

 

 

 

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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. 

 

 

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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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A. Michael Lipper, CFA

 

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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.

 

 

 

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

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?

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.