Mike
Lipper’s Monday Morning Musings
DIFFERENT
IMPLICATIONS:
DATA
VS. TEXT
School Solutions
As taught academically, the critical pivots in teaching both
economics and security analysis are the numerical changes of a data series. However,
as a long-term investor I am much more interested in the mood changes hinted at
in textual renditions. While data precisely represents the past, text allows
the reader/student to think about one or more different futures. This is why I
believe philosophy or similar courses should include both economics and
security analysis in their teachings.
Below is a brief listing of several data points describing
last week (Implications italicized and discussed in parenthesis).
- Year-to-date Stock Transaction Volume: NYSE 7.11% vs NASDAQ 37.30%
(Five times greater in the younger, more speculative market, even if some of the NASDAQ is inventory swapping among dealers. Speculation normally leads to extreme up and down prices)
- Inflation Signals: The ECRI Index tracks industrial prices weekly and it normally moves gradually. Last week it rose +1.70%.
(I believe this was in response to the tariff news at the end of the week. Some market participants believe there will be industrial price increases soon).
- Participants in the AAII sample survey are increasingly worried about a down market in stocks, but others are not.
(Comparing the bullish and bearish projections of last week with those 3 weeks earlier. Bearish projections rose to 43.7% from 34.8% 3 weeks earlier. Bullish bets only rose to 34.9% from 33.6% for the same period, suggesting bears see reasons to be worried while bulls do not. Only one will be right over the next six months.)
- Equity mutual fund peer group averages +10%. Only one US Diversified Fund (USDE) peer group average has generated returns exceeding 10% year-to-date, multi-cap growth funds. Forty other peer groups have generated returns exceeding +10%, although they were less diversified.
(USDE Funds hold more assets than the other peer groups, which suggests being a holder of US equities was not a winning hand for most.)
- Investors need to be careful that the earnings reported are not accounting constructions. The London Stock Exchange Group (LSEG) and I.B.E.S. estimate that the S&P 500 Index will report a +8.3% gain for the 3rd quarter. However, they further estimate that corporate net income will rise only +6.3% for the quarter. Thus, 24% of reported earnings will be attributable to buybacks and other accounting techniques.
(Investors need to understand what they are paying 20x-earnings or more for. Hopefully, operating earnings can be repeated while earnings created through accounting cannot.)
Conclusions:
There are lots of reasons to be cautious. Some reserves
should be considered a hedge for future down markets. However, this hedge should
be viewed as a temporary buying reserve until prices more appropriately reflect
the long-term value of accepting normal risk.
To aid future generations of investors as well those today, security analysis and economics need to be taught with a fuller understanding that it rests on the strength of ever-changing language.
Did you miss my blog last week? Click here to read.
Mike
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