Mike Lipper’s Monday Morning Musings
Rising Risk Focus
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Friday’s Four-Letter Word
In polite society we are encouraged to limit the use of
four-letter words. This could be the reason we try to not use them in the
financial world, which is a disservice to our performance analysis and
investment achievements. Thus, I am dedicating our 900th blog to articulating the
key to our investment survival, risk.
Risk is the penalty for being wrong, although it is also critical
to winning. Without risk there would probably be no rewards for winning. As
Lenin said, “There are decades where nothing happens; and there are weeks where
decades happen.” It is possible last Friday was one of those weeks. After an
extended period of “melt-up” from mid-April, stock indices, driven by a
minority of their stocks, fell by large single digits or more. The media
attributes the decline to employment.
Employment
Employment encompasses both large and small numbers of
people, including us. The impact of employment is much broader than the number
of people being paid to work, it influences both production and sales. (In the
modern world published data does not include people who work without pay.
Furthermore, there is no published data on the quality of the work done, nor the
quality of those who wish to be hired. For current employers with open job positions,
it is the absence of the last unknown factors which raises serious questions concerning
the likelihood those open slots will soon be filled.)
One problem with the employment data is that only about 60% of
the organizations report their numbers to the government on time, catching up in
subsequent months. Thus, adjustments are normal. The current period includes the
fiscal year ends for state and local governments, end of teaching year, and the
federal government shrinking its totals. Regular users of this data probably
understand these issues and adjust their thinking accordingly.
Bond Prices
Many businesses, governments, non-profits, and individuals generate
insufficient revenue to pay for their purchases each and every day. To the
extent they lack sufficient reserves of idle cash, they often borrow. Depending
on their size and credit worthiness they will use the bond or credit markets.
Unlike equity which has an indefinite life, bonds or credits have identified
maturities. Consequently, the providers of cash are very focused on the
short-term outlook of the borrowers. Each week Barron’s publishes a couple of useful
bond price indices, consisting of ten selected high-grade and medium-grade bonds
each.
Barron’s found another use for this data when they discovered
that medium-grade bond prices rose more than high grade bond prices within a
year of the stock’s price rise. Stocks decline when bond investors favor high-grade
bonds. On Friday, high-grade prices didn’t move while medium-grade bond prices
fell (yields went up). This is a negative prediction on the future of the stock
market.
The negative view is understandable, many of these credits belong
to industrial companies. Another source of information is the ECRI, which
publishes an industrial price index which tends to move slowly. However, by
Friday that index had risen 3.6%, which will increase inflation. (I assume it
was the result of the announced level of tariffs.)
Questions
Has the Administration in their planning adjusted their
expenses for the enforcement of tariffs? I wonder if we will see increased
smuggling across our borders if the tariffs stay on for long? Are we increasing
the Coast Guards’ budget? How much will Scotch
sales decline and Bourbon sales rise?
Please share your views.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Melt Up Not Convincing - Weekly Blog # 899
Mike
Lipper's Blog: It May Be Early - Weekly Blog # 898
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