Mike
Lipper’s Monday Morning Musings
Odds Favor A Recession Followed Up by the Market
Editors: Frank Harrison 1997-2018,
Hylton Phillips-Page 2018
The Art of Security Analysis
Security analysis uses science but is not science. Using
past statistical history of up vs. down markets, one can calculate the odds of
a down market. The odds suggest something along the lines of one down-market
for four up-markets. This math does not tell us anything about the amplitude of
the next up and down phases. Where the art comes into play is searching past
cycles to measure the varied amplitudes and more importantly the probable
causes. Market moves in the minds of market participants are often tied to
economic, financial, political, climate, and other elements. There is a human
need to explain phenomena, so it is natural that in most cases investors and
others attach some non-market element as the cause for the moment. In truth,
while it is comforting to label the movement as being caused by some external
force, no two market moves that are exactly alike. We cannot absolutely prove
the cause with any certainty.
While professional analysts look at many causes, they are not
really called on to make a judgement as to what is the next element that causes
the movement. Thus, professional analysts often rely on the irregular rotation
of up and down-market phases in commentary. Based on this principle, I am
turning bullish because I believe for whatever reason we have entered a
down-market of some unknown amplitude, which will be followed by an up-market,
again of unknown amplitude. History suggests, at least in the US, the odds
favoring a larger gain than the prior loss. To provide comfort, analysts
attempt to find reasons to support this belief, which I will do without the absolute
confidence I have found the motivating force of the eventual bull market. (Subscribers
are encouraged to suggest other drivers.)
Too Much Weight on One Side
In one edition of a supposedly learned publication, there were
three articles published with the headlines listed below. What are the chances the
Financial Times is wrong?
- “How Low Can the Dollar Go”
- “Trump lunches full-scale assault on American elite”
- “An all-out assault on the rule of law”
Is there any connection between the authors and editors?
This concerted view reminds me of the British Crown after they outlawed slavery
commercially while British merchants supported the US Confederacy. Did their support
have anything to do with the import of US cotton to fill their clothing
factories?
The Future
It seems commercial motivations override political
principles, which is true today. While politicians throughout the world are
concerned about factory employment, they do not favor the economically larger
consumer marketplaces. I find it interesting that the two largest consumer
markets are China and the US, which don’t have politically powerful unions
representing them!
On this side of the pond, Barrons Weekly published the stock
market performance of 28 national indices showing 14 European countries leading
as well beating the US local markets.
In the US it was the first week our indices were up a bit.
However, it was not true for the bulk of our stocks. Friday’s gain,
particularly on the NYSE, probably had more to do with the expiration of
options.
By definition, a stock owner is future oriented and usually
expects others to pay higher price/earnings ratios for their stocks in the
future. The depth of the bear market will depend on whether P/Es’s hold and if their
prices decline in line with earnings or rise in a cyclical recession or
collapse in a structural one. I don’t know which type we will suffer, although
many of the current administration’s moves appear to be more structurally
focused.
The World keeps on producing products and services that have
the potential to change economic patterns. Three recent products come to mind:
*New
lower cost airliners
*BYD’s
fast charging batteries
*Florida’s
leading the way to lowering property taxes
What do you think?
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