Risks Are Rising Thru the Clouds - Weekly Blog # 915

 

 

 

Mike Lipper’s Monday Morning Musings

 

Risks Are Rising Thru the Clouds

 

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

 

 

 

Overview

There does not appear to be a clear unified picture of the near-term future for the next couple of years. In examining a number of separate and distinct elements, each with their own limited cloudy outlook, I see a growing level of disconnected risks. Hopefully our intelligent subscribers can sense a positive future and share it.

 

Topics of Concern (In no meaningful order)

• The price of gold and crypto elements are rising, with the exchange value of the dollar falling more than 10% earlier this year. For centuries the single greatest attraction of gold was at the coin level, with the ability to bribe one’s exit from one country into another. Today, I am unaware that this is a major demand contributor. The Central banks appear to be the largest buyer, replacing some of the depreciating value of their large dollar holdings. While that might serve a few countries well, there is not enough gold in the world to fill all needs at any reasonable multiplier of current gold prices. Crypto also seems to be potentially price limited. At the moment I do not see any move by major countries to be a substitute replacement for the dollar.
• While the Chinese currency is now the third most used currency for world trade, I do not see any willingness of that government to use its currency for anything beyond its own trading. They do not want their currency to trade freely and absorb the turmoil of other countries.
• I do not see crypto as an alternative in size, particularly if it is US dollar based. Both gold and crypto don’t have a large industrial use, unlike silver to some degree.
• One possible substitute for the dollar is copper, and possibly some other base metals. One new problem for Dr. Copper is the expected increase in use by “AI”. It is interesting to note that Base Materials (Metals) were the second best performing mutual fund category in the current week (+4.44% vs -2.70% for the worst fund category Global Science & Tech.)  It may be worth noting that the ECRI industrial price index went to 115.50 from 114.80 the prior week, even though it does not normally move much.
• A significant number of casualty insurance companies have invested in private debt vehicles with limited liquidity.
• The weekly 6-month forward looking AAII sample survey found only 31.6% bullish and 49.1% bearish compared to three weeks prior, where the readings were 44.05% bullish and 36.9% bearish.
• In the current week there were more decliners than gainers on the NYSE and NASDAQ.
• A number of economists have noted that the top 10% of the population, often over 75 years old, own 50% of US wealth. The bottom one third, those who are 35 years old or younger, own 10%. (This may well explain the results of the only two governor elections this year.) This formation is being called “K shaped”.

 

I appeal to our readers to contribute your good thinking regarding the importance of these elements and to let me know how it affects your view on the global stock and money markets. 

 

 

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

Mike Lipper's Blog: The Inevitable Recession - Weekly Blog # 914

Mike Lipper's Blog: Biggest Investment Hurdle: Complexity - Weekly Blog # 913

Mike Lipper's Blog: Signals of Change in Historic Patterns - Weekly Blog # 912

 

 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

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Managing Mistakes - Weekly Blog # 652

 

Mike Lipper’s Monday Morning Musings

Managing Mistakes

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

Mistakes are common in all endeavors. That is why we should learn from them and raise the fundamental question as to why we don’t. In the US we have entered a two-month period where almost all the candidates make mistakes due to oversimplification, incomplete statements, over-worked staffs, inexperienced candidates, etc. Some of these unforced errors will cause a few candidates to change their preferences.

The political world should learn from the experiences of both the sports and military worlds. Most of the time the declared winners are the side that makes fewer mistakes at crucial points. On a win-loss ratio, General George Washington lost more battles in the American Revolution than he won, particularly in the earlier years. He won at Yorktown because he benefited from battles won in the South by other generals using fewer European tactics. Additionally, weather in the Atlantic allowed the Allied French fleet to depart from New England and kept the British fleet harbor bound while British politicians in London grew tired of an expensive war.

How does this focus on historic mistakes apply to portfolios? Like most American election choices which are already made up, most portfolio owners are sticking with their plans. Modified only after the election as a result of foreign political changes. 

The Crux of the Problem: Unrealistic Plans

Some individual and institutional investors are unhappy with their portfolio results and are seeking to make small adjustments. There is rarely an almost perfect portfolio than can be converted to complete satisfaction by the change of a single security or fund. The crux of the problem is addressing multiple needs with a single solution. Most often investors have a diversified portfolio in mind, but due to an emotional need to be with the crowd their investment performance is closer to that of the popular indices.

True diversity can only be accomplished long-term by a collection of winners and losers at different points in time. In our everyday lives we are both self-insurers and hedgers, taking on physical risks at home and at work. While we may have fire and auto insurance policies, they are unlikely to pay off enough to totally substitute the new for the old. In effect we accept the shortfall as part of the bargain embedded in the contract. In other words, we chose to tolerate less than complete perfection. Yet in our portfolios we wish to avoid any deficits in actual or relative returns. Understanding how the markets and life rotate disappointments and mistakes hopefully gives us the opportunity to own winners where the gains are much larger than the mistakes.

The so-called mistakes may quite possibly be insurance premiums to be activated in future periods. I therefore favor dividing a single portfolio into parts, first in terms of risks and second in terms of desired delivery time. If one has only a single portfolio then any “mistake” is a negative, whereas a portfolio that addresses different levels of risks or different time periods provides some insurance. Today’s risks include changing tax rates, materially higher inflation, fall of purchasing power due to currency changes, technological changes, management changes, political changes, medical and health conditions, and the unknowns.

Could This Be the Time to Change?

One of the disadvantages in pouring over current data is that whatever occurred recently has little to do with what will occur subsequently. Nevertheless, the performance of equity oriented mutual funds for the week ended last Thursday could be indicative of future directions. In contrast to the slight decline of -0.85% for the average S&P 500 Index fund, 87 fund peer groups did better. The five peer groups averages that did best included: Base Metals Commodity Funds +2.49%, Latin American Funds +2.46%, Financial Services Funds +1.87%, Utilities Funds +1.58%, and Agricultural Funds +1.38%. I know of not a single portfolio that holds all five weekly leaders. The only common denominator is that these groups underperformed the S&P 500 for a considerable period of time, as did most of the other 82 peer groups. 

This is not only a US phenomenon, of 44 markets in local currencies only 15 Ex US markets gained, including 2 European markets (Moscow and Spain). In contrast to many of the pro-inflationary funds groups, the average 6-month money market deposit account interest rate declined to 0.19%, down from 0.22% the prior week and a three year high of 0.72%, signaling that many banks cannot find secure borrowers to lend to.

One additional symptom of a speculative market producing a lot of gains for some nervous holders is the change in trading volume on a year over year basis. NYSE listed stocks +7.84%, DJIA stocks +46.09%, NASDAQ +84.86% and Dow Jones Transport stocks +186.19%. Traders of volatile stocks are likely to look for future volatility.

Working Conclusions:

Clear investment answers are not likely to be revealed immediately after the US elections. I suspect we will be in for a period of excess volatility that will attract more cash off the sidelines. This uneasy period is not likely to end until most if not all the cash has been consumed. While this frenetic period continues, there will be time to transform a single portfolio into a collection of portfolios based on different needs and risk appetites. All portfolios should have sufficient reserves to absorb the mistakes that will occur without hurting the investment objectives too much.

Question of the Week? Are your ready for Changes?     

 

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

https://mikelipper.blogspot.com/2020/10/momentum-is-slowing-under-too-many.html

https://mikelipper.blogspot.com/2020/10/mike-lippers-monday-morning-musings-are.html

https://mikelipper.blogspot.com/2020/10/what-is-nasdaq-saying-to-whom-weekly.html

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 - 2020

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.

Short-Term Recognitions Plus Longer-Term Work - Weekly Blog # 590

Mike Lipper’s Monday Morning Musings

Short-Term Recognitions Plus Longer-Term Work

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

Short-Term Recognitions
We have reports of financial cycles since the beginning of recorded history and are always in some phase of a cycle. The keys to financial survival and future success are to recognize where we are in the present cycle, something which is almost always difficult to do emotionally. It is tough to label the current down draft. Is it a trading incident, a correction (normally about 10% from peak), the beginnings of a “bear market” (normally about 20% from peak), or a major crises that occurs once in a generation, with a decline of 50% or more? Only time will tell which of the alternatives describe our immediate future.

In the current US stock market most of the trading volume is from groups that are short-term oriented. With this orientation they tend to react to changes in sentiment rather than long-term trends. In the current market environment, I tend to focus on price changes for the NASDAQ Composite Index, which has risen the most of the three main stock market indices. The Composite includes a fair number of tech stocks and companies that provide services. Both of these have been growing their revenues faster than the industrial companies in the Dow Jones Industrial Average (DJIA) and the more broadly invested Standard & Poor’s 500 Index. (If it weren’t for the weak performance of the mid/small mixed financial services companies in the NASDAQ Composite, the lead would be even larger.)

Viewed in this light, the most recent weekly difference in the number of stock prices rising or falling may be instructive. The New York Stock Exchange (NYSE) had 373 gainers and 440 losers, whereas the NASDAQ had 203 gainers and 516 decliners. The NASDAQ is only off -5.21% from its peak, half-way toward being labeled a correction. Clearly one goes through each gradation until the ultimate bottom is reached. Whatever the appropriate level, some further fall is a reasonable expectation.

As I and others have stressed, the current market is led much more by sentiment than the investment fundamentals found in financial statements. Nevertheless, one should recognize that sentiment can impact prices for securities, currencies, and commodities. Each week The Wall Street Journal (WSJ) shows the weekly price movement of 72 items. Like many sentiment indicators, the rises and falls are normally bound in a 60/40 range. This week only 30% of the prices rose, with 70% declining. If attitudes toward prices remain outside of their normal range, it could be significant and could point to a larger decline than a mere correction.

One statistical series that may be misinterpreted is the constant sale of stocks by well-known value investors. These trimmings are being viewed as disenchantment with the holdings and while some disenchantment may be true, before reaching that conclusion it is necessary to review their record of inflows and outflows. When these previously successful investors are forced to make a partial liquidation they often choose among their most liquid positions, not necessarily their weakest. This has been the pattern for many quarters. If the downturn becomes more pronounced the time for trimming will likely end and favor totally selling out of selected names that may not have the same chance of price recovery. This typically happens near the end of market declines.

Time to Build Research Lists
In past market declines my fellow analyst friends would have lists of names and prices they wish to recommend to clients and/or purchase for themselves. All too often these lists are not executed due to the low-level of confidence in the new analytical work being done. It is with these thoughts in mind that I am now suggesting that this is the time to begin in-depth work on new names, not in portfolios or coverage patterns.

The first place I would look for candidates is the mutual fund investment objective averages. There are 19 fund averages that have risen less than 6% this year and 4 that have produced negative returns. These are:

Agricultural Commodities     -8.88%
India                        -5.58%
Natural Resources            -5.26%
Base Metals Commodities      -2.80%

Apart from the funds focused on India, the other three are classic supply/demand vehicles which are now suffering from insufficient demand for the current supply. We know from history that these conditions lead to future supply being curtailed by the withdrawal of some of the participants, although with both population and wealth growth there is little question that future demand will be higher than today’s level in the future.

India is a fascinating opportunity currently experiencing internal political issues. Nevertheless, it is the fastest growing major economy in the world. Faster than China and within twenty years it will have a bigger population too. Fourteen of the remaining investment objectives focus on international investing, many with an Asian mandate, highlighting two possible attractions. The first is summed up in a quote from the Chief investment Officer of Matthews Asia. “Growth that depends less on trade and more on continued savings, efficient investment, and institutional reform. All things to which Asia remains committed.” For a global investor, the largest risks is a decline in the value of the US dollar relative to other major currencies. (This may also reflect a relative decline in the standard of living for many US residents.)

The only domestic oriented investment objective with a low year-to-date average return of +4.25% is Small Company Value Funds. As with other value-oriented investment objectives, performance has lagged most other groups for the past several years. These funds must meet redemptions by liquidating and dealers might not be willing to take their discard into their limited inventory. The three commodity types mentioned above will rise when their markets are dealing with shortages.

There is another category that at some point may include some real bargains, internally driven turnarounds. Internally driven turnarounds most often result from new leadership and the restocking of operating management with new talent. Introducing new products and services with attractive pricing will also help. Unlike the swing from oversupply to shortage, internally driven turnarounds take time and may attract short sellers who are not patient.

Investment Conclusions

1. Review your portfolio for those positions you want to own for the next bull market and dispose of the rest.
2. Start the lonely job of researching new potential holdings which are likely to be winners in the next new market phases.

Questions of the Week:

1. Are you prepared for a down market?
2. Are you looking for the next Bull Market Winners?  

Did you miss my past few blogs? Click one of the links below to read.

https://mikelipper.blogspot.com/2019/08/sentiments-approaching-reversal-points.html

https://mikelipper.blogspot.com/2019/08/is-last-week-significant-weekly-blog-588.html

https://mikelipper.blogspot.com/2019/07/chinese-emperors-learn-all-roads-lead.html



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 - 2019
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.