Long-Term Money Via Telescope, Not Microscope - Weekly Blog # 951

 

 

 

Mike Lipper’s Monday Morning Musings

 

Long-Term Money Via Telescope,

Not Microscope

 

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

 

          

 

Historical Perspective

One lesson from studying history, including geology, is guessing the very next move in a series, which is more likely to be random than consecutive. The news business is an exception, selling a detailed description of what just happened. For example, the weekend chronicles might point out that more stock prices went down than up for the latest week and did so with higher volume. They’ll mention that only 58% of the NYSE stocks declined for the week, including 38% on Friday, compared to the NASDAQ where 64% fell for the week and 55% fell on Friday. Not one of these pundits mention that in the earlier part of this year and most of last year a greater portion of the stocks traded on the NASDAQ rose. More importantly, these stocks were bought much more recently than those on the NYSE. This suggests that both the purchase and sale of the NASDAQ stocks were speculative, not long-term oriented investments.

 

Switching to the telescope for longer time periods. Long-term investors should focus on the changing structure of the US population, where more than 1.8 million people left the workforce (169 million in June 2026 vs 171 million in September 2025). Some of these people trade stocks and participate in the weekly sample survey of the American Association of the Individual Investors (AAII). This week they turned bearish on their outlook for the next six months, with only 29.6% now being bullish, down from 44.9% the prior week. Bearish beliefs have risen to 42.3% from 32.9% the prior week.

 

Investors have generally missed gains in some global and international funds, as well as commodity and alternative funds. To understand the current performance of diversified funds you need to recognize the increased concentration in a limited number of sectors. The history of making money in the stock market often goes along with being lonely during changing long-term future trends.

 

One advantage of devoting time to investing is occasionally seeing some occurrences replay. On Thursday there was the rescheduled White House Correspondents Dinner with the President speaking, which reminded me of my time as chair of the program committee of the New York Society of Security Analysts. I suggested to the President of the Society that we invite President Gerald Ford, the only non-elected president of the US to speak to the analysts. I was given permission to invite him, with the deep belief that it wouldn’t happen. I called the White House and spoke to the lead speech writer who thought it was a great idea, agreeing to speak to the higher authorities. Surprisingly, they were looking at opportunities for the President to speak to the financial community about his “Whip Inflation Now” or “WIN”. I was invited to visit the White House to meet with the speech writer and go over the President’s thoughts on the subject. It became clear that they didn’t really care about my political views, but what jokes would be appropriate. I rejected most of the jokes. Shortly thereafter President Ford came to our meeting quarters on Williams Street. He came with Alan Greenspan and Frank Zarb, who had just joined the Cabinet after a career of turning around several brokerage firms. A topic I would have liked to hear more about. When the President came to the NYSSA, he was the first President since George Washington to speak on “Wall Street” while still in office. He included all the proposed bad jokes.

 

When President Trump spoke to the correspondents this week, he also told jokes that did not go over well. It seems as if Presidents speak about what they want and not about what their audiences want to hear. Like many investors, they don’t learn from history.

 

Those of us who pay attention to future liabilities for clients and ourselves should focus on the long term. What do you think?    

 

 

 

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Mike Lipper's Blog: Before Focusing on Shorter-Term Reactions - Weekly Blog # 950

Mike Lipper's Blog: Little Occurred During the Trading Week - Weekly Blog # 949

Mike Lipper's Blog: Searching for Future Long-Term Picks: Gathering Assets, Reasons to Search - Weekly Blog # 948

 

 

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Fixed Income Risk Hurts Alternative Funds

Introduction

Debt and equity are the two essential building blocks for all portfolios. With the current dichotomy between equity and debt indicators that were hinted at in last week’s post there appears to be more risk of capital loss in many alternative funds than investors perceive.

Surge in Introducing New Alternative Funds

As with most “new” ideas, nothing is rarely new, but a reworked old idea in new clothes, often the famed emperor’s new clothes. Early British Trusts as well as US vehicles were primary concerned with the preservation of capital for multiple generations; an idea that appeals to me and many of my investment accounts. The adopted solution used in many cases were the selection of investments that often move in inverse directions avoiding chances of complete destruction from a single event, think of Lloyd's Shipping syndicates. As these investment vehicles grew an additional defensive mechanism was added, diversification. Thus, in the US many of the first funds were balanced funds that held diversified bond and stock holdings. Still today many bank trust accounts as well as other institutional investors compare their investment performances to the Lipper Balanced Fund Index found in the Wall Street Journal and currently produced by my old firm. However, the traditional Balanced fund has been replaced by a whole category of Mixed Asset funds with current net assets of $2.2 Trillion or roughly equal to the total US hedge funds and in the same region of US listed ETFs (Exchange Traded Funds). In Canada Balanced funds are the single most popular fund type.

From this base many new funds were launched with the same desire; that is to offer to investors a less risky way to achieve good upside performance with controlled downside risk of loss. Right now there are approximately 500 of these products on offer in the US. Recent trips to Canada and Europe revealed that alternative funds have become a hot sales item. Almost all of the newer versions of Balanced funds in addition to stocks and bonds of various types include derivatives, private equity, venture capital, use of leverage, and selling short. In the past, there have been a handful of experts that have produced very worthwhile results individually with these types of investments.

There are two types of risks in these funds, the management company created risks and the inherent investment risk in the asset class. Many of these vehicles are being produced and sold by investment groups that have hungry indirect and direct sales forces for new products after several years of lackluster performance from their historic book of business. They either try to develop portfolio management talent internally or hire past winners in smaller shops with significant incentive contracts. Considering many of these firms past history to me either approach adds to the risk in their vehicles.  As we not only invest for clients and ourselves in many mutual funds, we also invest in many of the world’s publicly traded management company stocks. Thus we measure results from different vantage points. This is similar to a comment in the recent The Economist on celebrating the 100 anniversary of Einstein’s 10 equations where they said “What you measure depends on your vantage point.” To us the long term profitability of the management company contributes to the attractiveness of some of its investments, particularly in markets that are crowded with good competitors.

The inherent investment risk in most Alternative Investments is based on the structures of interest rates and credit conditions. Granting a huge assumption that the specific portfolio is not at risk as to what looks like significant changes coming, other portfolios will be at risk and that will cause prices and flows to change, perhaps in an unpredictable fashion.

Fixed Income Indicators of Investment Risks

The market speaks often in numbers and price movements not providing full explanations. For example:

Last week Barron’s measure of “Best Grade” bond yields declined 3 basis points to 3.75%. indicating an increase in popularity for high quality. In the same week its measure of yields for intermediate credits rose 6 basis points to 5.12% measuring some uneasiness about intermediate credits. (One might look at these relationships and postulate that the stock market is not in danger of losing assets to bonds until short-term rates run up to 3.75%  to 5.12%. I have always believed that the Bond Market is a better analyst than the stock market, as it has to be, for it has a lower upside potential.)

Last week one of the credit agencies noted that since there has already been 99 defaults this year, we will soon be in a triple digit period which is likely to grow.  Considering in general the relatively low revenue growth of non-energy companies, the odds favor more defaults and are the reason for the increasing of the yield spread on “junk bonds.” Stock funds including ETFs had inflows of $2.9 Billion and Bond Funds had net outflows of $2.8 Billion in the week ending before Thanksgiving.

By nature I am uncomfortable with crowded markets because the participants often accelerate their price/volume actions to get out of the crowd as fast as they can. Thus, I found of interest that Bank of America/Merrill Lynch produced a list of the four most crowded markets in the eyes of hedge funds:

 1. Long US Dollar

 2. Short Commodity Stocks

 3. Short Emerging Market Stocks

 4.  Long US Tech Stocks

If I had long-term risk capital, my instinct would be to take the opposite views of these hedge funds for the first three and possibly the fourth bet.

The three Alternative investment objective classification averages on a year to date basis are minimally above or below the average of US Diversified Equity funds and well below the average Large Cap Growth fund and other funds that own the “FANG” Group = Facebook, Amazon, Netflix, and Google or a slightly larger group known as the “Nifty Nine,” including the first four plus Priceline, eBay, Starbucks, Microsoft, and Salesforce. Both groups are up 60%.

Perhaps, the most salient point of analysis is that because of the other somewhat dour coverage I did not see the need to go over to the Mall at Short Hills to report “good, but not great” Black Friday. I will be interested to see how the merchants handle their inventory liquidation.

Question of the week: How much risk do you perceive in your bond holdings?     

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