A Contrarian Starting to Worry - Weekly Blog # 886

 

 

Mike Lipper’s Monday Morning Musings

 

A Contrarian Starting to Worry

 

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

 

                             

 

Misleading Financial Statements

First quarter earnings reports, led by financials, are generally positive. Good news if maintained often leads to rising stock prices, which is not what at least one contrarian is expecting. Nevertheless, comments and actions by decision makers at various levels highlighted those worries in April.

• In the wealth management industry, one is seeing an increase in smart firms selling out at good prices. These firms are being paid by companies who believe they need to bulk up rather than do what they do best.
• Some endowments and retirement plans are shifting to less aggressive investments or passive strategies, suggesting the intermediate future appears riskier.
• Buyers of industrial goods or materials are paying less than they were a year ago. The ECRI price index is down 8.08% over the last year.
• Active individual investors, or their managers, are predicting a worsening picture in the next six months. The American Association of Individual Investors (AAII) sample survey’s latest reading shows the bulls at 21.9% compared to 25.4% a week earlier.
• In April, 48% of businesses announced reduced profit expectations, compared with 33% in March. More concerning, 41% lowered their hiring expectations, versus 29% the month before.
• Fewer Americans are planning to take vacations this year. Those planning to take one are using their credit cards less, said American Express and Capital One.

We may get some useful commentary next weekend from the new Berkshire Hathaway Saturday annual shareholders meeting format. The somewhat shorter Berkshire meeting with different speakers maybe cause a day’s delay in sending out the weekly blog.

Since the middle of the last century, we have seen a growing concentration of investment firms and banks. In the first quarter of this year, Goldman Sachs, JP Morgan, Morgan Stanley, and Citi were involved with 94% of global mergers & acquisitions (M&A). With more structural changes likely to be caused by modifications in trade, tariffs, taxes, and currencies, the odds favor continued concentration. This concentration may well lead to increased volatility and a reduced number of competent financial personnel throughout the global economy. This is unlikely to make investing easier for some of us.

 

Question: Can you show us a bullish point of view where we can invest for future generations?      

 

 

 

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

Mike Lipper's Blog: Generally Good Holy Week + Future Clues - Weekly Blog # 885

Mike Lipper's Blog: An Uneasy Week with Long Concerns - Weekly Blog # 884

Mike Lipper's Blog: Short Term Rally Expected + Long Term Odds - Weekly Blog # 883

 

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.

Generally Good Holy Week + Future Clues - Weekly Blog # 885

 

 

 

Mike Lipper’s Monday Morning Musings

 

Generally Good Holy Week + Future Clues

 

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

 

                             

 

Holy Week

The driving celebration of the week ended Sunday was the three dominant religions being able to conduct their Services peacefully. The US stock market contributed four days of generally rising prices, although there were clues related to critical concerns.

 

First, a slightly smaller percentage of NASDAQ stocks rose in price (59%), vs. 69% on the "big board". NASDAQ prices are generally more volatile and have a more professional audience than those on the followers of only New York Stock Exchange (NYSE). NASDAQ stocks have outperformed NYSE stocks for some time and one could conclude that their participants are more clued in than NYSE followers.

 

In considering our domestic markets, we should not forget our present and future are influenced by global actions. For example, last week the older western European stocks on average did better than our domestic stocks, even though they will be impacted by various tariffs and recessions. The twin concerns, tariffs and recessions, were the main worries during the four-day market week. As a contrarian thinker I believe both concerns are not properly focused.

 

I believe President Trump is using the threats of tariffs primarily as a force to begin a much larger, more powerful, and more difficult conversations. These conversations can be lumped under the label of non-tariff trade barriers. No single law or regulation will cover all these topics. They can only be addressed by the heads of the various countries, which Trump hopes will be brought to the negotiating table or private discussion by the threats of large tariffs.

 

Trump believes there are two main areas where the US is being disadvantaged, local trade restrictions and manipulated foreign exchange rates. Additionally, he believes only the most senior people can reach an effective compromise and he is willing to adjust US tariffs and other factors to reach his objectives. If I am close to being correct there is no telling what the ultimate results will be, as all negotiations will need to be reviewed in light of competition with other countries. Thus, we need to pay attention to the various twists and turns that will take place, to the extent they are revealed, and not to jump to any conclusions.

 

The second conundrum facing us as both citizens and investors is recognizing that periodic economic declines are inevitable. The world has not repealed personality traits, the impact of technology, nor climate conditions, which will all impact our financial condition.  

 

Goldman Sachs Studies

Goldman believes the odds of a US recession are getting higher. They studied the history of recessions and were able to divide the past into cyclical and structural recessions. On average, cyclical recessions end within a year and structural recessions average twenty-seven months.

 

My Most Fearsome Concern

We have all learned that history does not repeat itself, but rhymes. Thus, as an analyst my first exercise is to look at the worst decline the US has ever experienced, the Depression. As there is almost never a single individual who causes a major economic change, it is a mistake to label the cause of the Depression under a single name.

 

The 1920s was a period of rapid expansion of debt and even looser morals. By the end of the decade, both farmers and smaller banks were heavily in debt. To bail them out congress came up with the Smoot­-Hawley tariffs. (Similar to today, politicians were counting votes, while the financial side of government was concerned about the debts of dealers who had farmers as clients, as well as local small banks. The latter was such a concern that when FDR campaigned, he promised to keep the banks open then immediately close them after coming into power. To some degree, this experience may be like today's tariffs.)

 

When FDR came in with his "brain trust" of Harvard professors, they sought to change much of how the country was to be governed. (Somewhat similar to how edicts from the Supreme Court and other judges have been used to force change.)  

 

Much of what President Trump and Elon Musk are trying to accomplish is structural. Even if they can find effective people to carry it out, it will take a while to deliver the new ways of doing things to the marketplace. On the basis of the above thinking I fear the next recession will be structural, lasting a few years. I hope I am wrong.

 

Question: What do you think?

 

 

 

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

Mike Lipper's Blog: An Uneasy Week with Long Concerns - Weekly Blog # 884

Mike Lipper's Blog: Short Term Rally Expected + Long Term Odds - Weekly Blog # 883

Mike Lipper's Blog: Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

 

Did someone forward this blog to you?

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.

 

An Uneasy Week with Long Concerns - Weekly Blog # 884

 

 

 

Mike Lipper’s Monday Morning Musings

 

An Uneasy Week with Long Concerns

 

 

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

 

                             

 

The Week that Was

Harkening back to an old London-based television program focused on the week’s changes, the following items of interest and perhaps importance crossed my computer screen:

1.  Two brief bear-market type rallies.
2. The US dollar broke par on Friday, finishing at 100.102. (Marcus Ashworth of Bloomberg believes that as much as some try to find a successful substitute, it can’t be found.)
3. Price signals – The Baltic Dry Index fell to 1274 vs 1729 a year ago; The ECRI industrial price index fell to 113.27 or -4.33% from a year ago. (This index measures the prices of industrial materials needed for production e.g. metals.)
4. Only Precious Metals and Dedicated Short mutual fund averages gained for the week ended Thursday.
5. Volatility increased in the week, with InfoTech stocks leading with gains of +9.67% while the Hang Seng Index fell -8.47%. (Normally the high/low spread is closer to high single digits than 18 percentage points.)
6. Market liquidity may be a major contributor to the market indices ranking year to date; DJIA -6.94%, S&P 500 -10.43%, and NASDAQ -15.14%.
7. Both analysts at Morgan Stanley and those contributing to Seeking Alpha Quant Ratings downgraded mid-cap investment bankers and mid-sized fund manager stocks. (Compared to their larger peers they rely almost exclusively on their brains, rather than a combination of brains and capital.)

 

Longer-Term Implications

• Howard Marks believes we have seen the best economic period in history.
• Marcus Ashworth believes we have entered the beginnings of a new phase this week.
• President Trump has told associates that he can tolerate a recession, but he is afraid of a depression.

 

Question: Do any of the elements mentioned in this blog aid or lead to a change in your thinking?

 

 

 

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

Mike Lipper's Blog: Short Term Rally Expected + Long Term Odds - Weekly Blog # 883

Mike Lipper's Blog: Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

Mike Lipper's Blog: Odds Favor A Recession Followed Up by the Market - Weekly Blog # 881

 

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.

Short Term Rally Expected + Long Term Odds - Weekly Blog # 883

 

 

 

Mike Lipper’s Monday Morning Musings

 

Short Term Rally Expected + Long Term Odds

 

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

 

                             

 

Short-Term Rally

Focusing exclusively on short-term data suggests that when there is a strong broad market trend in one direction for an extended time, a countertrend is likely to surprise proponents of the longer primary trend. That is what I am expecting in the days and possibly weeks ahead, a somewhat explosive rise in the general market indices. Below are some indicators of why an explosive rise is likely:

• On Friday, 90.5% of the stocks on the New York Stock Exchange (NYSE) fell in price. Typically, when 90% of a universe goes in one direction, it is close to being exhausted.
• In looking at the daily price charts of both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average, from their historic peaks to Friday’s close they have declined enough from their historic high points to conclude that the last rise has been fully discounted.
• A third set of indicators is the weekly sample survey from the American Association of Individual Investors (AAII). The sample survey divides the views for the market six months from the current date into bullish, bearish, and neutral. In an idealized state one would think approximately one-third of the sample would fall into each category, although that is likely not the case since it is an audience of stock owners. Thus, the “normal” vote favors a bullish view. Recently, the survey showed a contrarian result in favor of the bears and two weeks ago the split was almost 2 to1, 59.2% bearish and 27.4% bullish. This week the ratio was much closer to 3 to1, 21.8% bullish and 61.9% bearish). In theory the AAII survey’s audience is made up of retail investors who have a good long-term record of guessing right, but not at turning points. Perhaps this time the public is in-line with the professionals.

 

When discussing a possible rally with people, I urged them to use the opportunity to reposition their portfolio for a new bull market, not the old one that may already have concluded in 2024.

 

Putting Tariffs in Perspective

While not perfect as a future model, it may be useful to compare the current situation with the early 1930s. The US was in the early stages of a “normal” cyclical recession triggered by the creation of too much debt.

Coming out of WWI there were constraints on the economy, men were returning to the workforce, the farm belt was producing food for a starving world, and Russia was having extreme economic problems. Additionally, the banking community was pushing out debt to support the expansion of the 1920s, including margin loans from Wall Street.

 

As the rest of the world was getting back on its feet it was better able to feed itself, which reduced the price of food produced by US farmers. Many started to leave the farm-belt, with young men streaming into factories as small farms merged into larger ones. They were increasingly replaced by machines, which were sold to farmers on debt carried by the local small farm banks. The farmers, their dealers, and their banks, all needed to be recapitalized. They appealed to their politicians who passed the Smoot-Hawley Tariff Act, which President Herbert Hoover reluctantly signed. Unfortunately, numerous other countries followed our lead, which led to a world-wide recession.

 

Why is this important to us?

There is an uncomfortable parallel with our situation today. We have permitted or encouraged prices to rise for eggs, meat, and milk, among other commodities. In other words, we have inflated our expenses. While not often aligned, Chairman Powell and Jaime Dimon are both very concerned. Interestingly, Jaime Dimon is a corporate descendant of J.P. Morgan. In 1907, in an attempt to head off a major crash, JP Morgan locked the leading bankers in his library and refused to let them out until they individually agreed to recapitalize the failing Trust companies.

 

What is the parallel to what we may be facing today? When FDR became the President in March of 1933, with his “brain trust” he like Trump was dealing with a cyclical recession which was not his fault. Somewhat like FDR, Trump appears to be turning a cyclical recession into a structural recession, using tariffs as the tool.

 

What Happens Now?

I don’t know, and I believe President Trump himself does not know. He knows what he wants to happen, but he doesn’t know whether he has enough Republican support to make it happen. The following is a possible path to what will follow:

1. The first not fully completed step, the announcement which focused on the rate of the proposed tariffs. President Trump is aware that there are at least two other critical issues that impact world trade; the regulations that deal with the negotiation of the size and shape of trade and payments, and secondly the price level of the currencies involved.
2. The next phase is the public or private position of the various countries.
3. Is the President really after the negotiation, which he feels is his skill set?
4. Implementation of the trade agreement. How will any of the agreements really work and be enforced. (This is the topic I am most concerned about as it takes skilled players to make it work. We have not seen many of these.)
5. Cheating is to be expected. How will it be handled?
6. The new or refurbished plants will eventually produce excess capacity.
7. If the dream becomes the world we live in, will it be a less artificial world than we live in today? Can we handle it?
8. The time to complete the process, if it fails, will be short. The Smoot Hawley Tariff ended three years after its passage. If the process succeeds, it is likely to take many years and different administrations.

 

I would appreciate your thoughts    

 

 

 

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

Mike Lipper's Blog: Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

Mike Lipper's Blog: Odds Favor A Recession Followed Up by the Market - Weekly Blog # 881

Mike Lipper's Blog: “Hide & Seek” - Weekly Blog # 880

 

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.