Mike Lipper’s Monday Morning Musings
“Hide & Seek”
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Friday’s Victory Signal?
After an extended period of stock price declines, prices
shot up on Friday. The “Bulls” hoped it was the beginnings of a “V” shaped
recovery, but some market analysts were skeptical. A strong move often ends
when there is a 10 to 1 ratio between buyers and sellers, which was the case with
Friday’s 10 to 1 ratio.
The Wall Street Journal publishes “Track the Markets:
Winners and Losers” in their weekend edition. It tracks the moves of 72 index,
currency, commodities, and ETFs weekly. It may be worth noting that only 35%
rose for the week.
The Second Focus
The media, and therefore most of the public focus on daily
price changes. Even with the growth of trading-oriented hedge funds and the conversion
of former securities salespeople into fee-paid wealth managers, the portion of
the assets invested in trading is less than the more sedate investment accounts
invested long-term for retirement and similar institutional accounts. My focus
is on the second type, which includes wealthy individuals.
The Current Administration is Ignoring Us
The first step in security analysis courses often starts
with reading what the government puts out in order to develop a foundation for
an investment policy. The current administration is the most transactional in
memory. The President, Vice President, and Sectaries of Treasury and Commerce
made and lost money on market price changes. This has forced me to find other
sources to build our long-term investment philosophy.
Inevitable Recessions
Studying both recorded history and our own lives, it tells
us that life does not move in straight lines, but in cycles of irregular
frequencies and amplitudes. Simplistically, we can divide these movements into
good and bad periods. However, an examination of the periods reveals differences
in how each period affects us. The differences and how they affect us depends on
where we begin each cycle, the magnitude and shape of the cycle, and any surprises
along the way.
Both up and down cycles are caused by imbalances within
their structures, which often occur due to other imbalances known or unknown.
Most importantly, any study of cycles indicates they happen periodically and
surprise most participants. Even with detailed histories of cycles they can be
difficult to predict, although the root cause of most cycles is extreme human
behavior.
While some cycles are caused by natural weather-related
events, most economic cycles are caused by envy and/or too much debt. I am
perfectly comfortable predicting a recession will hit us, but don’t know for
sure when it will occur. (In a recent discussion with a small group of senior
and/or semi-retired analysts, they felt there was a 65% chance of a recession within
12 months.)
The fundamental cause of cycles is often the result of people
reaching for a better standard of living through excessive use of debt, which often
results in a struggle to repay debt and interest. At some point the growing
federal deficit, combined with growing consumer debt, as evidenced by credit card
delinquencies, will force a decline in spending. Reduced spending will lower
GDP and production. The fact or rumor of this happening is enough to bring
securities prices down.
Confusing Hide and Seek
Hiding is not the solution to avoiding a loss of purchasing
power, both actual and supposed. Cash is the only true defense, although it is
not a defense against inflation which reduces the purchasing power of most assets.
However, the biggest long-term loss from hiding is foregoing future potential
high returns.
Our Approach
I believe a cash level no larger than one year’s essential
spending should cover the crisis bottom. Most of the remaining capital should
be devoted to seeking out substantial total returns that can produce multi-year
gains.
Where are these Gems?
Bargains are usually hidden in plain sight. One example
might have been the fourth quarter 2024 purchase of European equities, which
were priced for a European recession. However, European equities actually generated
expanded earnings from Southeast Asia, Latin America, and Africa. (In a recent
discussion with one of the largest investment advisers negative on investing in
Europe. Their views were based on their continent’s own economics, while paying
insufficient attention to companies growing profitably in the aforementioned
regions)
Thus far in the first quarter I have been lucky enough to
own both SEC registered mutual funds and European-based global issuers. (It
took patience because earlier performance periods were not good.) This shows
the need to be courageous when seeking future bargains.
We would appreciate learning your views.
Did you miss my blog last week? Click here to read.
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