Was it the week that wasn’t? - Weekly Blog # 917

 

 

 

Mike Lipper’s Monday Morning Musings

 

Was it the week that wasn’t?

 

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

 

 

 

Does 3 ½ US Trading Days make a week?

The bullish media and “street” pundits were thrilled that the 3½ day trading week restored early November losses to the popular stock averages, although they were disappointed the rise did not breakthrough to new highs. Looking at the results, they resembled a week from a younger bull market.

 

Reality may have been the problem

At least one analyst calculated that if you eliminated all “AI” related activity since 2019 “the market” is probably down. This suggests that since 2019 we have experienced a slowly declining bear market. The Conference Board’s measure of confidence recently dropped to 88.7%, which was more than the expected reading of 93% and the prior reading of 95.5%. HP, the old equipment producer part of Hewlett Packard, joined many other large employers in announcing expectations of a 10% job cut. The American Association of Individual Investors (AAII) sample survey for the last three weeks reported bullish projections of 32.0%, 32.6% and 31.6%, respectively for the next six-months. Their bearish projections remained in the 40-49% range.

 

Regular subscribers to these blogs have learned of my concerns about the declining quality of balance sheets, a warning sign of economic turmoil. One measure of this is the much larger growth in volume on the NASDAQ vs. the “Big Board”. In the short Friday trading session, the decline in volume on the NASDAQ was twice as large as the percentage decline on the NYSE.

 

Two Causes of Economic Turmoil

As with the runup to the 1929 crash, the Roaring Twenties led to overconfidence (AI?) and unsound leverage (Private Capital?). The organizational hollowing out is causing an increase in execution risk. Governments, universities, businesses, and families reacting to increasing financial strain are looking to improve efficiencies. Efficiency, not effectiveness, is measured by output vs input. Many have assigned revenues or other outputs to those at both the top and bottom of the production ladder. The people in the middle, mostly supervisors/middle management, have not been credited with the output assigned to those at the top and bottom and have been reduced or eliminated entirely. One glaring example is the federal government, although this trait is found throughout society. The President has had difficulty getting many of his actions approved by the courts. In numerous cases there was insufficient careful staff work, which would have phrased efforts better or would have raised internal discussion instead of simple loyally in attempting to execute flawed orders. This is a pattern exhibited in other organizations.

 

Thoughts?  

 

 

 

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Mike Lipper's Blog: Recession/Depression Risk Assumptions - Weekly Blog # 916

Mike Lipper's Blog: Risks Are Rising Thru the Clouds - Weekly Blog # 915

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

 

 

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It May Be Early - Weekly Blog # 898

 

 

 

Mike Lipper’s Monday Morning Musings

 

It May Be Early

 

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

 

 

 

A Usual Trap

A classic mistake in making future plans is focusing mainly on the present. In search of an investment policy for the next few years or longer, one should look at the causes of the main trends, not the size of the tariffs that have been announced.

 

The key force behind the announcements on tariffs is Donald Trump. His background is one of complex negotiations evolved from materially different views of how he sees the present and the future. I believe The President saw a critical problem of unfair trading terms facing the U.S. and saw a way to change the terms in favor of the country. He saw a way to solve the problem through meaningful discussion with the powers on the other side. The key was getting the right people around the table.

 

The core elements of unfairness are to be found in non-tariff trade barriers (NTB) erected by commercial interests with official or unofficial government support. (A number of examples were listed in last week’s blog, copy available.) While there is no published total of each country’s NTB effects, some experts believe their impact is twice the level of tariffs applied.

 

Mr. Trump’s way of dealing with foreign countries is to make the host nation an ally by using the size of US tariffs as a hammer. This is the reason behind the high announced tariffs, which is where President Trump expects the real bargaining to begin. I expect negotiations with major trading partners to take most of the summer. We may never fully understand the various changes to NTB’s, but a good clue will be changes to US tariffs.

 

Clearly there is another element to the aggregate size of the final US tariffs, the amount of cash expected to be paid to the US Treasury. This needs to be meaningful enough to keep the growth of the annual deficit acceptable to an unknown number of Republican Senators.

 

Most of these should be settled in the fall and early winter, so they do not unduly impact the mid-term elections. The economic background to the elections may be influenced by layoffs and the administration’s attempt to expand the economy. Additionally, further international actions may be the cause of how some state elections turn out.

 

The current crosswinds shown below may also impact the level of markets during this period:

1. After a period of outflows, T. Rowe Price is cutting staff.
2. Freight railroads are growing from China to Iran and Spain, for US continental trains, and other trains from Canada to Mexico.
3. Tariffs may encourage smuggling.
4. The latest weekly American Association of Individual Investors (AAII) sample survey showed a 39% positive and negative 6-month outlook.
5. A study of structural bear markets shows the average breakeven to be about 9 years.
6. The critical operating problems facing the US government is no different than those facing commercial and non-profit activities, a focus on effectiveness, not efficiency.
7. Jaimie Dimon has shared the following thoughts:

• Tariffs will be inflationary
• US reserve currency status rests on military superiority
• Markets are not low
• Lessons can be learned from the turnaround of Detroit and problems created (and elongated) during the 1929 crash
• Dollar weakness helps US multinationals 

As usual, I hope you will share your insights on the various thoughts expressed.

 

 

 

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Mike Lipper's Blog: Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

Mike Lipper's Blog: Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

 

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An Uneasy Week with Long Concerns - Weekly Blog # 884

 

 

 

Mike Lipper’s Monday Morning Musings

 

An Uneasy Week with Long Concerns

 

 

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

 

                             

 

The Week that Was

Harkening back to an old London-based television program focused on the week’s changes, the following items of interest and perhaps importance crossed my computer screen:

1.  Two brief bear-market type rallies.
2. The US dollar broke par on Friday, finishing at 100.102. (Marcus Ashworth of Bloomberg believes that as much as some try to find a successful substitute, it can’t be found.)
3. Price signals – The Baltic Dry Index fell to 1274 vs 1729 a year ago; The ECRI industrial price index fell to 113.27 or -4.33% from a year ago. (This index measures the prices of industrial materials needed for production e.g. metals.)
4. Only Precious Metals and Dedicated Short mutual fund averages gained for the week ended Thursday.
5. Volatility increased in the week, with InfoTech stocks leading with gains of +9.67% while the Hang Seng Index fell -8.47%. (Normally the high/low spread is closer to high single digits than 18 percentage points.)
6. Market liquidity may be a major contributor to the market indices ranking year to date; DJIA -6.94%, S&P 500 -10.43%, and NASDAQ -15.14%.
7. Both analysts at Morgan Stanley and those contributing to Seeking Alpha Quant Ratings downgraded mid-cap investment bankers and mid-sized fund manager stocks. (Compared to their larger peers they rely almost exclusively on their brains, rather than a combination of brains and capital.)

 

Longer-Term Implications

• Howard Marks believes we have seen the best economic period in history.
• Marcus Ashworth believes we have entered the beginnings of a new phase this week.
• President Trump has told associates that he can tolerate a recession, but he is afraid of a depression.

 

Question: Do any of the elements mentioned in this blog aid or lead to a change in your thinking?

 

 

 

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Mike Lipper's Blog: Short Term Rally Expected + Long Term Odds - Weekly Blog # 883

Mike Lipper's Blog: Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

Mike Lipper's Blog: Odds Favor A Recession Followed Up by the Market - Weekly Blog # 881

 

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Odds Favor A Recession Followed Up by the Market - Weekly Blog # 881

 

 

Mike Lipper’s Monday Morning Musings

 

Odds Favor A Recession Followed Up by the Market

 

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

 

                             

 

The Art of Security Analysis

Security analysis uses science but is not science. Using past statistical history of up vs. down markets, one can calculate the odds of a down market. The odds suggest something along the lines of one down-market for four up-markets. This math does not tell us anything about the amplitude of the next up and down phases. Where the art comes into play is searching past cycles to measure the varied amplitudes and more importantly the probable causes. Market moves in the minds of market participants are often tied to economic, financial, political, climate, and other elements. There is a human need to explain phenomena, so it is natural that in most cases investors and others attach some non-market element as the cause for the moment. In truth, while it is comforting to label the movement as being caused by some external force, no two market moves that are exactly alike. We cannot absolutely prove the cause with any certainty.

 

While professional analysts look at many causes, they are not really called on to make a judgement as to what is the next element that causes the movement. Thus, professional analysts often rely on the irregular rotation of up and down-market phases in commentary. Based on this principle, I am turning bullish because I believe for whatever reason we have entered a down-market of some unknown amplitude, which will be followed by an up-market, again of unknown amplitude. History suggests, at least in the US, the odds favoring a larger gain than the prior loss. To provide comfort, analysts attempt to find reasons to support this belief, which I will do without the absolute confidence I have found the motivating force of the eventual bull market. (Subscribers are encouraged to suggest other drivers.)

 

Too Much Weight on One Side

In one edition of a supposedly learned publication, there were three articles published with the headlines listed below. What are the chances the Financial Times is wrong?

• “How Low Can the Dollar Go”
• “Trump lunches full-scale assault on American elite”
• “An all-out assault on the rule of law”

Is there any connection between the authors and editors? This concerted view reminds me of the British Crown after they outlawed slavery commercially while British merchants supported the US Confederacy. Did their support have anything to do with the import of US cotton to fill their clothing factories?

 

The Future

It seems commercial motivations override political principles, which is true today. While politicians throughout the world are concerned about factory employment, they do not favor the economically larger consumer marketplaces. I find it interesting that the two largest consumer markets are China and the US, which don’t have politically powerful unions representing them!

 

On this side of the pond, Barrons Weekly published the stock market performance of 28 national indices showing 14 European countries leading as well beating the US local markets.

 

In the US it was the first week our indices were up a bit. However, it was not true for the bulk of our stocks. Friday’s gain, particularly on the NYSE, probably had more to do with the expiration of options.

 

By definition, a stock owner is future oriented and usually expects others to pay higher price/earnings ratios for their stocks in the future. The depth of the bear market will depend on whether P/Es’s hold and if their prices decline in line with earnings or rise in a cyclical recession or collapse in a structural one. I don’t know which type we will suffer, although many of the current administration’s moves appear to be more structurally focused.

 

The World keeps on producing products and services that have the potential to change economic patterns. Three recent products come to mind:

               *New lower cost airliners

               *BYD’s fast charging batteries

               *Florida’s leading the way to lowering property taxes

What do you think?    

 

 

 

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Mike Lipper's Blog: “Hide & Seek” - Weekly Blog # 880

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Implications from 2 different markets - Weekly Blog # 854

 

Mike Lipper’s Monday Morning Musings

 

Implications from 2 different markets

 

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

 

 

 

On balance the New York Stock Exchange (NYSE) and NASDAQ stocks serve very different investors, as they have different outlooks and current performances. The “Big Board” stocks tend to be older, larger capitalization, have greater media exposure and get more attention from Washington. They are likely to populate brokerage accounts managed or influenced by former commission generators who have since converted to being fee paid advisors. The NYSE also services institutional accounts with substantial capital with limited research and trading professionals, which generally appeals to older clients.

 

Those in Washington and “news” rooms may not be aware that the NASDAQ is home to 4627 stocks vs 2903 for the NYSE, as of this week. In recent years the NASDAQ composite has materially outperformed the NYSE stocks, often identified as the 30 stocks in the Dow Jones Industrial Average (DJIA).

 

NASDAQ stocks are often more volatile than those traded on the NYSE, because they are smaller and have fewer liquidity providers. This may be the reason why those without trading experience shy away, resulting in more block trades and 3-5 times more NASDAQ volume.

 

Many people confuse the NASDAQ with its Over The Counter (OTC) origin. The NASDAQ is a regulated stock exchange, distinct from the OTC market which is held together by the pink and yellow sheets publishing the competing bid and asked spreads of competing dealers. Since its earlier days, important constituents of the NASDAQ have consisted of local companies, medium size banks, and some foreign stocks.

 

While the NYSE focused on its regulatory responsibilities, the NASDAQ grew through an extensive marketing effort. This marketing effort happened at a time when a large number of what we now call “Tech Companies” were looking to find a trading home. These tech companies joined the NASDAQ exchange, attracting younger, more aggressive, professional investors and traders.

 

Implications

Trying to determine the future is impossible, but military intelligence (an oxymoronic term) attempts to do this by gathering separate elements of information to see if they provide a pathway to one of many futures. This is the approach I take in thinking about the future. While most pundits focus on present price relations, I don’t find them particularly useful. We need to guess what future prices will be for specific future periods.

 

In the short run the following inputs may be relevant:

1. This week’s high/low prices were 548/168 for the NYSE vs 411/393 for the NASDAQ (Enthusiasm/Caution)
2. Friday’s percentage of advances were 85% for the NYSE vs 68% for the NASDAQ (Winners are less happy)
3. The weekly AAII bearish sentiment increased to 31% from 25% the prior week.
4. Financial Services shorts as a percentage of float saw Franklin Resources* at 8.5%, FactSet at 6.0%, T. Rowe Price* at 4.6%, Raymond James* at 4.2%, Regional Financial at 4.1%, and the sector at 1.9%. (*held in personal accounts, unhappy          near-term)
5. Ruth’s indicator, the size of the Vogue September issue, is the biggest month for high fashion advertising, perhaps like the lipstick indicator. (The closing of Western shops in China is further proof of the expected global recession, or worse.)

 

Longer-Term Indicators

1. The White House is preparing to introduce a Corporate Alternative Minimum Tax (CAMT) of 15%, which is unlikely to pass the next Congress.
2. Both Presidential candidates are pro inflation in action, if not in words.
3. A front-page WSJ article titled “As Berkshire Hathaway* Rallies, Its Looking Too Rich to Some”, is an example of poor research. Warren Buffett has repeatably stated that he is not running the company for the present shareholders, but for their heirs, which is far beyond his 93 years. To my mind, the GAAP published numbers are misleading considering the SEC’s regulations. The value of a stock is an elusive intrinsic number. The most difficult part is the private value or current price of the 60 odd companies Berkshire owns, which are carried at purchase price plus dividends paid to Berkshire. To the right buyer, the aggregate eventual price for these companies is worth a multiple of their carrying value. (“Intrinsic Value” was a concept that I learned from Professor David Dodd, who authored “Security Analysis” with Ben Graham. This is probably the reason I and some of my accounts own the stock. We own the stock for its eventual value to our family.)
4. The world is in stages of a slowdown or a recession, with both the US and China suffering. Always treating China as an adversary inhibits our access to the Chinese market and their skills, preventing us from reaching our potential. (I don’t have a suggestion on how to conduct this rescue effort. It is like training a dangerous animal).                                                                                                                                         

 

Conclusions:

There will always be bear markets, which often precede recessions and infrequent depressions. Since we haven’t had a recession in a long time, one is likely coming. Particularly considering the political class’s stock optioned business management and the gift of a highly valued dollar compared to other deficit currencies.

 

The key question at the moment is when we will see the next INCREASE in INTEREST RATES and INCOME TAX RATES, which the Fed will follow.

 

Key Question: What is Your Bet as to When?

 

 

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Mike Lipper's Blog: Investors Focus on the Wrong Elements - Weekly Blog # 853

Mike Lipper's Blog: Lessons From Warren Buffett - Weekly Blog # 852

Mike Lipper's Blog: Understand Numbers Before Using - Weekly Blog # 851

 

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A Cyclical World + Consistent Results - Weekly Blog # 812

 

Mike Lipper’s Monday Morning Musings

 

A Cyclical World + Consistent Results

 

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

 

 

What We Don’t Know

We don’t know the dates and length of the next “bear market", or if it will “correct” the imbalances causing material problems for society. Similar questions have been asked throughout recorded history in the Bible, and even before that.

 

We have numerous records of rising and falling fortunes for both countries and individuals. In terms of specific people, we know of births, deaths and various sicknesses, as well as successes and failures. In a two-dimensional chart we can see the highs and lows. Unfortunately, we don’t know all the underlying causes for these end points. These events often occur at unpredictable times and suggest to me that while we can guess as to the next occurrence, there is no guarantee our timing will be precisely correct.

 

This creates a problem in managing client money. Prices move up and down, reaching end points at different speeds and magnitude. To judge the skill of investment managers, it is most useful to measure them against as appropriate index, particularly of reasonably selected competitors. This approach is in conflict with many owners of investment capital who have obligations to periodically pay some income/capital to beneficiaries. Consequently, owners without substantial payment reserves prefer to measure their results in repeatable calendar periods.

 

Going Out on a Limb

Based on a casual study of financial history preceding Biblical times, I am confident we will continue to have investment cycles. Thus, I believe we will have down markets in the future ahead of us.

 

Our job as analysts and portfolio managers is to estimate how deep the next major decline will be, and when it will likely occur. I am reasonably sure we will have a downturn in the US stock market before the end of 2028. What I do not know is whether this will be a cyclical bear market for most stocks, or a more serious correction of major imbalances addressing quality of leadership in education, the health sector, the military, and government.

 

(There is some evidence that the coming decline will be cyclical rather than corrective. History suggests most investors should maintain current holdings in sound companies, riding through the cyclical decline to benefit from the bull market that follows. On the other hand, if the decline is going to address various imbalances, many managements and companies will be replaced.)

 

Current News Bits Could Show the Way

1. Julius Baer has taken a $93 million bad loan provision, which includes holdings in Selfridges and the Chrysler Building. (The loan was made to a well-respected global player.)
2. Private equity firms are buying back failed IPOs.
3. According to Marcus Ashworth of Bloomberg, the supply of Sovereign Bonds will rise sharply through at least 2026. (This will likely keep interest rates from falling).
4. Goldman Sachs is predicting the S&P 500 will gain 5% without dividends and 6% with dividends in 2024. More importantly, the S&P 500 would end the year at 4700. The record high was 4724 on 1/3/22, so no bull market anticipated. Additionally, there will be no P/E increase until 2025, which would have the S&P 500 P/E at 20x at the end 2025.
5. The use of currencies has been innate in some people since civilizations began. Sam Bankman-Fried in a NYC jail used the currency of inmates to purchase a haircut for 4 packs of mackerel.
6. A visit to the high-end “The Mall at Short Hills” saw an orderly but unenthusiastic crowd practicing controlled shopping, fitting the merchant’s expectation of a dull Christmas.

 

Summing Up

The fact that the 3 popular market indices are all within 1% of their annual highs on relatively low transaction volume does not generate excitement. The presently dull Christmas Season is more attuned with global commercial real estate debt issues and increasing layoffs in the financial community.

 

Cash yields of 5% or higher are currently a hurdle to investing for the longer-term. We appear to be in some form of suspended animation.

 

Please share how you see things, particularly if you disagree.

 

 

 

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Mike Lipper's Blog: Recognizing a Professional: Ratings vs Ranking - Weekly Blog # 811

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Mike Lipper's Blog: Preparing - Weekly Blog # 809

 

 

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Preparing - Weekly Blog # 809

 

Mike Lipper’s Monday Morning Musings

 

Preparing

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

 

 

 

Little did we know that nursery tales were preparing us to be sound investors. Remember the story of the three little pigs who all built homes, but only one survived the storms because he took the time to build with bricks.

 

Later, we grew up and found ourselves in a marching unit alert for the preparatory command, immediately prior to an execution order. We should always have been searching for preparatory signals to avoid major losses and unexpected gains.

 

Last week we warned that sudden rallies are usual in “bear markets”. Only time will tell if we have entered a bear market and if we should identify the following as preparatory signals. (What is your opinion?)

• Perhaps the soundest bank in Asia, DBS, was instructed by Singapore banking authorities to suspend various expansion efforts for 6 months.
• The leading banker in the US announced that he intended to sell roughly 12% of his ownership in the bank for estate and other reasons a year from now.
• In a private discussion, a CEO of a very successful private company bemoaned many companies for not being close enough to their customers to help guide them through the coming problems.
• Both Goldman Sachs and Morgan Stanley have reduced employment of talented people a couple times. A major large private investment organization has done the same.
• I went to an upscale department store looking for an appropriate business casual shirt in my size. The store only had small, medium, and large shirts, not the usual array of arm lengths or shirts with 2-inch variations. This brought home the statement by UPS that their package business from Hong Kong was down because retailers were reducing inventories.
• Panera just announced that is laying off 17% of their workers before they do an IPO. There has been an increase in mergers, but most of them are stock for stock deals. This is a sign that cash is too expensive, and their own stocks are no longer cheap.

 

Preparing Oneself

Marcus Ashworth is a brilliant columnist, which means that I agree with him. He wrote “Probably the most underrated skill in finance is knowing when to sell”. It may be wise to first identify what to sell. I suggest the first step is to identify each holding in terms of purpose, as either speculation or investment. The main difference between the two is whether your bet is based mainly on the belief that the price will rise. Or alternatively that earnings will grow, new products/strategies will be launched, new leadership will be in place, or there will be a closing or a collapse of principal competitor.

 

The next step is to find or create an appropriate peer group. (This is easier for mutual funds.) Then, in the shortest reasonable time-period, arrange the peer group into quintiles. (Caution, avoid dividing the peer group into quarters or halves.) If the peer group you are studying is a narrow-based specialty, your best bet is to be in the top or bottom quintile. If it is in the bottom quintile you are betting on the changing character of your investment making it a winner. These types of securities normally do best for brief periods.

 

I follow a different approach for diversified equity holdings. My approach is less volatile than the general market and spends most of the time in the second or third quintile. It is rarely in either of the extreme performance quintiles. These placements are appropriate for long-term holdings with periodic payments to beneficiaries and has the benefit of keeping clients happy and maintaining relationships.

 

When to Sell

The biggest risk for many long-term investors is impatience, which was noted by Blaise Pascal in the 1600s. He said, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” This sitting approach works better with large portfolios of high-quality stocks, because over time the gains will be greater than the losses, particularly during inflationary periods.

 

We are quite possibly not in such a period. Charlie Munger recently commented that during Berkshire Hathaway’s (*) first four decades of Warren Buffet’s ownership history it was relatively easy to pick sound investments. In looking at the company’s 3^rd quarter report there were a considerable number of subsidiaries whose earnings were disappointing, but the success of their larger positions more than made up for those that declined. (They have built up a very sizeable cash reserve in anticipation of finding good future homes for their acquisitions.)

* Owned in managed or personal accounts

 

Outlook(s)

The longer-term outlook is quite attractive, with IBES estimating S&P 500 earnings per share reaching $276.02 in 2025 compared to $218.09 in 2022. The current concern about corralling the rate of inflation does not seem to be an issue with 30-year US Treasury paper yielding 4.75%, not much different from the 10-year rate of 4.56% and the 2-year rate of 4.83%. (I suspect that there is considerable amount of leveraged buying of 2-year compared to the 30-year, which is one of the reasons shorter rates are higher.)

 

However, the reason for discussing multiple outlooks is the shorter-term future looks more troubled than the longer. If one treats the period since the beginning of COVID-19 as a single unit, we have been going through stagflation with volatility. One of the reasons the stock market has done as well as it has is due to an increase in leverage, both operational and financial. Revenues have been going up marginally, but reported and adjusted earnings have risen by a multiple of sales. This resulted from an increase in private debt and other forms of debt extensions driven primarily by large caps. (In the latest week, declines represented 1% of the companies traded on the NYSE vs 23% on the NASDAQ). I previously alluded to the number of middle size companies owned by Berkshire not doing as well as in the past.

 

There were contradictory indicators delivered this week. On Saturday the WSJ reported that 90% of the weekly prices of securities indices, commodities, currencies, etc., were up. The sample survey of the American Association of Individual Investors (AAII) had 50.3% bearish over the next 6 months vs. 24.3% that were bullish. The bearish reading is not only twice the bullish, but entered an extreme reading and was much larger than it has been over the last couple of weeks. (It is possible that the sample skewed differently this week or participants reacted to the news.)

 

My Operating Conclusions Remain the Same

 

Some trouble ahead, with better markets in 2025. 

 

 

 

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Mike Lipper's Blog: Indicators as Future Guides - Weekly Blog # 808

Mike Lipper's Blog: Changing Steps - Weekly Blog # 807

Mike Lipper's Blog: Change Expected - Weekly Blog # 806

 

 

 

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Indicators as Future Guides - Weekly Blog # 808

 

Mike Lipper’s Monday Morning Musings

 

Indicators as Future Guides

 

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

 

 

Since before humans began recording history, they looked to the past to predict the future, believing the Powers (God or Gods) would repeat.  This belief was fortified by the introduction of numbers which repeated. Thus, as numbers were collected to create past performance records, humans arranged them into groups of indicators to predict the future.

The problem with this approach is that we treated the collected numbers as indictive of the future. Numbers that are an incomplete historic record are an abstraction of the events. Missing from the scores are two critical elements.

1. What else was simultaneously happening was rarely recorded within the same or relevant time period.
2. There was little if any documented notation regarding motivations. So, we do not know why certain things were done.

 

Despite these drawbacks we enshrine indicators as the proximate causes of people’s actions. This is particularly true in using historical actions to settle contemporaneous actions in legal disputes, e.g. The Prudent Person rule.

 

(Commercially, I am happy with the reliance on past data, for it encouraged the desirability of past mutual fund performance, fee, and expense data. However, my stack of losing racetrack tickets demonstrates that the past is not the absolute prolog for the future.)

 

Nevertheless, in the absence of “divining rods” indicators are useful devices in looking for future guidance, or for a good crutch.  To reduce my reliance on placing too much importance on my investment thinking, I examen numerous indicators, and where possible what else was happening at the time, trying to ascertain motivation. From my handicapping experience, I am aware that popular choices pay off less than choices that are less popular.

 

The following, in no specific order, are some indicators I look at each week and my reactions to them.

 

Transaction Volume Location

This week on the NYSE, 77% of traded shares declined, with only 59% declining on the NASDAQ. (I believe there is currently more transaction volume by both the public and less experienced managers on the NYSE. Note, NASDAQ prices gained more this year and thus have more to give back if we are in a general decline.)

 

Corporate Announcements

Korn Ferry*, a major employee sourcing firm announced that it was dismissing 8% of its work force. (If their corporate clients were planning to hire soon, they wouldn’t be letting people go. ADP* also forecast a      decline in customer’s payrolls, which hurt their stock. Additionally, UPS predicted lower shipment volume coming from China, suggesting retail merchants are cutting back.

(* Owned in personal or managed accounts, not recommended.)

 

Congressional Indicators

A split Congress is expected to last at least through the next election. With very little legislation enacted, Democrat inflationary actions and Republican deficit cuts are unlikely to materialize.

 

Future Investment Performance

Double digit equity performance is not normal, and triple digit performance is even less so. The better performing ten-year university records are in the high single digits. 12% of American taxpayers had a net worth of over $1 million net, with the bulk of their assets in securities and their homes. Current private equity and debt investing is on average producing low single digit returns. Private investments are showing signs of aging, relying on raising new money from the public and newly managed accounts that were formally paid commissions. New and less experienced managers are entering the business.

 

Current Prices

The weekend WSJ publishes the price moves of securities indices, currencies, commodities, and ETFs. I track the % up vs. down to get an overall feel for the 72 investments. This past week only a 1/3^rd were up. Of interest were the top/bottom two, Nymex Natural Gas +9.14% and Lean Hogs +6.75% vs. -6.29% for the S&P 500 Communications and -6.19% for the Dow Jones Transportation. (This suggests to me that these extreme prices are the result of sudden news items. With 3 of the 4 extremes in the +/- 6% range, it suggests this is a normal move for surprises.

 

Working Conclusions

1. The general primary trend is moving down.
2. In a bear market there are sudden rallies.
3. Long-term investors should look to buy opportunities that will be different than past winners over the next ten years, or possibly five. There will be material restructuring of society, the economy, and the leadership of many political, corporate, education, and non-profit groups.

 

Share your thinking with us.

 

 

 

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

Mike Lipper's Blog: Changing Steps - Weekly Blog # 807

Mike Lipper's Blog: Change Expected - Weekly Blog # 806

Mike Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805

 

 

 

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