What is Pending and When - Weekly Blog # 947

 

Mike Lipper’s Monday Morning Musings

 

What is Pending and When

 

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

 

          

 

Who is Foreseeing?

We are entering a new phase at the Federal Reserve Bank where the new chairman wants to look to the unknown future rather than recorded history. He is searching to find a different set of indicators than government collected survey data. I always thought that the lunch discussions presidents of the local reserve banks had with “captains” of local industry were an attempt to gather this data. I believe what he is looking for is the kind of inputs many companies gather daily or weekly. (I knew the number of subscribers for each of our fund data products plus the number of new subscribers each week. Additionally, I knew the number of special individual reports generated, and the amounts of commissions earned each week.) I hope he gets what he wants, it will probably improve the efficiency of what the Fed decides.

 

My big complaint to the members of my securities analysis profession is that most of their reports focus on relatively short-term investment performance: the quarter, the rest of the calendar year, or one year. While that has some value for the media or gatekeepers, it has very little analytical value.

 

In viewing the work produced under the rubric of Securities Analysis, it is important to remember that the original text on the subject was written by Ben Graham, an investment manager and adjunct professor who favored “cheap” stocks. He was assisted by David Dodd, a full professor at Columbia University who taught accounting courses. Their original text was written in the middle of the depression. The key to their writing and financial survival was to avoid losses. Little attention was paid to making money, which came later. This bearish bent was echoed in the SEC’s Investment Company Act of 1940, which was not written by members of the SEC or their staff, but by a bunch of trust lawyers with heavy input from lawyers in Boston, New York, and Philadelphia. For them, the key issue was avoiding large losses and being sued. I took Securities Analysis under Professor Dodd at Columbia.

 

The More Modern Era

One could selectively make money by venturing into the market with new listings trading at a discount. An approach highlighted after WWII when war industries recommitted to the commercial world with new high energy leaders. However, far too many of the new ventures of the late 1940s produced large losses for their investors. By the late 1950s more pragmatic leaders emerged, with the “bull market” of the 60s bringing new generations into the market. The fear of losses ebbed in the late 60s, resulting in  the idea of some leading stocks being held forever. This led to economic decline and a downturn in market enthusiasm which lasted into the mid-1980s. Since then and up to this calendar year the emphasis has been on making money, not avoiding losses.

 

We Have Possibly Entered a New Era

In last week’s blog I suggested that the critical market indicator has shifted from the Dow Jones Industrial Average (DJIA), from the late 1940s through the mid-1980s, to the institutional Standard & Poor’s 500 (S&P 500) from the mid-1980s to until very recently, and in the current period to the NASDAQ Composite. This week the DJIA was up 3 days and the S&P 500 was down 5 days. The NASDAQ was also down 5 days, but by a larger amount each day than the S&P 500 institutional measure. This seems appropriate as it rose more, driven by “AI” and the technology craze. I believe it is sensible to label this a technical correction.

 

More concerning is the market sensing a change in our future. Much of the current leadership comes from the retail side, whose increased numbers were driven by the conversion of retail brokers becoming wealth managers to earn a fee rather than a commission. The significance of this shift is that for the first time investment performance will be measured on the retail side. These new “managers” may panic and be quicker to sell than the institutionally oriented mutual fund portfolio managers. We may already be seeing this in redemption rates and attempts to redeem closed-end target date funds. Institutions have long experience with the cyclical results of below investment grade debt. Is it possible retail investors will lead the whole market in worries about declines?

 

Are There Reasons to be Worried?

I believe it is too early to be categorical about the next major decline, though I do believe it could happen. The following are potential signs of one or more major declines. (Going back to my course with Professor Dodd, I believe we should be prepared for the following pending triggers to generate meaningful declines.)

• The biggest potential trigger is that we have not experienced a depression since the election of FDR in 1933, which did not end until 1942 because of his mismanagement. Skipping several cyclical recessions, the prior depression globally was in 1873. Thus, it has been 93 years since the beginning of the last depression or 84 years since it ended. (Depressions are caused by mismanagement and too much debt in the financial system.) The present administration, by personality, not policies, is very similar to FDR’s.
• The surprise to the leaderships of attacks on Bahrain’s US Naval Base and Ukraine’s attack on Crimea. The nations hurt were thought by their people to be prepared for these attacks. Both nations have people worried about their country’s intelligence and governance.
• Changes in Federal Reserve governance may be destabilizing.
• ACA Insurance healthcare payments showed unexpected reductions.
• Lack of progress on addressing Social Security solvency
• Focus on innovation, but only on the mechanical side. In the US innovation typically has a bigger impact on sales size and structure.
• Quality of schooling and home life vs. education retards growth and military preparedness. Probably negatively impacting marriage and childbearing.
• Legal immigration

 

For the last 10 years only the average Large Cap Growth and domestic global Science and tech funds have beaten the S&P 500 Index fund average. For the current year-to-date period, 57 sector averages did better out of 104 equity sectors. The game has changed.  

  

What are Your Thoughts About?

• A possible Depression?
• What are we not prepared for?
• Will the 2026 election decide anything?
• What will the 2028 election decide?
• Any other thoughts or comments?

                                         

 

 

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

Mike Lipper's Blog: Too Many Short-Term Worries To Pick Long-Term Winners - Weekly Blog # 946

Mike Lipper's Blog: Is This the Last Hurrah? - Weekly Blog # 945

Mike Lipper's Blog: New Era? - Weekly Blog # 944

 

 

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