Showing posts with label Buyouts. Show all posts
Showing posts with label Buyouts. Show all posts

Sunday, March 30, 2025

Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

 

 

 

Mike Lipper’s Monday Morning Musings

 

Increase in Bearish News is Long-Term Bullish

 

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

 

                             

 

Another Term for History: Uneven Cyclicality

In describing the behavior of people and other animals the terms of optimism and pessimism are appropriate, particularly the extreme emotions in overcoming risks. These actions drive all kinds of markets, including climates. Extreme increases and decreases occur irregularly, with people forgetting the pain caused by collapses.

 

We may currently be entering a negative economic cycle, possibly caused by an exaggerated political cycle. The biggest danger in focusing on the probable down cycle is retreating from a continued effort to search for early up-cycle clues.

 

A lawyer who practiced at a bank during the Great Depression mentioned that he hired workers every day to work on bad loans. During this period there were some activist investors who purchased defaulted securities, hoping to hold them for a partial or full recovery of face value. Some of the more well-known players were Ruth Axe, Max Heine, Ben Graham, and David Dodd, among others. Current conditions are not yet at this level of pain, but some smart people are examining the potential for such a period, both in the U.S. and elsewhere.

 

What is Happening Now?

Moody’s (*), in its latest proxy statement, predicted a continued multi-year decline. PIMCO is reluctant to buy long-term US Treasuries. Small and Mid-Cap stocks are dropping more than large-cap stocks on down market days because there is only liquidity in large-cap trades. This suggests that sizeable positions may have to be held until there is a sustained recovery.

(*) Owned in client and personal accounts

 

The two major consumer confidence surveys showed sharp drops in their March reports. One long-term negative factor facing the US is the relative unproductiveness of the entire educational process for investment capital. In the public school system, the number of administrators has increased eleven times the rate of growth in the number of students. (Sitting on a number University boards I have seen the same tendency at their level.) The mental health needs of the students have almost become a sub-industry. Many homes are not effective educational sites either.

 

What are the Investments Prospects?

As someone who basically learned analysis at the New York racetracks, I turn to the availability of numbers and ratios. Most dollars invested in equities are for funding needs beyond ten years. Consequently, I am using the median investment performance of the larger peer groups of mutual funds for the last ten years, as shown below:

    Large-Caps      8.50%

    Multi-Caps      7.92%  

    Mid-Caps        7.57%     

    Small Caps      6.82% 

    International   5.19%

(I think the overall range of 8.50% - 5.19% is a reasonable compound return for the next 10 years, considering the two years of 20% or more in the last 10 years. However, I don’t think the rank order of the peer groups will work out the same as it has in the past. Large-Cap performance is too heavily dependent on a concentrated group of high-tech companies. Small and mid-caps should benefit from buyouts and the movement of talent from larger companies to smaller companies. International funds may be the beneficiary of reactions to US government actions. I recently added Exor, the Agnelli family holding company, to my personal portfolio.

 

With so many controversial views expressed, I am interested in learning your view.

 

 

 

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

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

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

Mike Lipper's Blog: Separating: Present, Renewals, & Fulfilment - Weekly Blog # 879



 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Sunday, January 9, 2022

Deeper Thoughts - Weekly Blog # 715

 



Mike Lipper’s Monday Morning Musings


Deeper Thoughts


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




Governments Manipulate Markets More Than Markets Manipulate Governments

Warning: Some of your basic beliefs will be challenged by the following analysis. Accept what you will. The value of this blog is the path of analysis, which may cause you to think differently about some matters.


Finally, a Wake-Up Call

In the first trading week of 2022, the US stock market experienced an unexpected downdraft on relatively light volume. Normally, the first week of the year is one when pension funds and other retirement accounts (401k) make their annual commitments to equities, usually giving the market an upward bias. Why not this year? Two possible clues emanate from the yield on 10-Year US Treasuries and NASDAQ Composite prices. They both often lead US markets in direction, which in turn tends to lead most global markets.

While the New York Stock Exchange (NYSE) experienced more up volume in 4 of 5 days, the NASDAQ experienced more downside volume in 3 of 5 days. The NYSE up volume may result from the annual commitment of retirement accounts. The NASDAQ’s higher percentage of new lows, 16.4% vs 7.6%, uncovers some disturbing results. About 20% of NASDAQ stocks have fallen into “bear market” patterns. (As regular subscribers know, I use the NASDAQ price performance as a leading indicator, partially due to the relative absence of passive investors in that market. While I have no data to support my view, NASDAQ investors hold their positions for shorter periods due to more buyouts and bankruptcies.)

From a broader perspective, the rise in 10-Year Treasury yields to 1.77% may be even more significant. Over the weekend, the Bloomberg news crawl indicated European investors being shook by the drop in US Treasury prices. I believe this was mostly the concern of European central banks, excluding the Swiss National Bank. (The SNB has been investing in US stocks to cover the pain caused by the rising value of the Swiss Franc. Their largest position is a meaningful investment in Apple *.) The play in UST paper, until this week, has been the strength of the dollar. Even when hedged, its net yield was better than most other government debt. I believe many European accounts needing dollar debt have gravitated to non-government bonds.

(*) Owned in personal accounts

The decline in US government paper was long overdue. While probably still the safest large currency, the credibility of this Administration’s word is a growing concern. s Most rational global investors were shaken by the way the US retreated from Afghanistan, leaving many people promised entry into the US stranded. Currently, our use of words rather than military force to protect the people of Ukraine downgrades belief in the US. The Administration’s Anti-Trust efforts to buy union votes at the expense of commercial capital is also a worry. 


Almost All to Blame for Growing High Inflation

For political reasons, many governments look to solve social problems through central control. Led by politicians with no real-world experience they utilize top-down thinking. This is called socializing the problem, which requires money from the “well-off” to keep the unfortunate barely above water. Charity has been part of the world since the organization of religions. One biblical view is that it is far better to teach someone to fish (profitably), than to feed them fish. If governments truly wanted to help, they could arrange tax structures to encourage charity, with some constraints on charitable organizations.

Instead, today’s political leaders follow the ancient Roman political practice of providing bread and circuses (games) to keep the lower classes quiet. Over time, the costs of this strategy led to raising taxes. High taxes took money out of the commercial economy and led to underspending on military and other vital services. These choices led to a weakened state that was overrun by The Barbarians. Almost every global empire has fallen due to a similar pattern of political leadership, high taxes and a weak military.

There are two ways of reducing financial wealth, taxes and devaluation through inflation. The Romans did it by reducing the amount of gold and silver in their coinage, we are doing it through higher prices. Milton Friedman stated, “inflation is always and everywhere a monetary phenomenon”. Inflation accelerates with a shortage of critical goods and services. Many governments pay lip service to solving society’s ills by borrowing today and repaying later, in money devalued by inflation. Both the current and prior Administrations have practiced this policy. 

The financial history of Donald Trump was massive borrowing with debt often settled at below face value. By the time Trump built his Casinos in Atlantic City, he was already running out of sources of credit, which led him to depend on Deutsch Bank. (As some of his debt was publicly traded, an analyst in a Philadelphia brokerage firm wrote a report questioning the soundness of the debt. Trump tried to get the analyst fired using his bully tactics but luckily, he was not successful. His major Casino went bankrupt and its debt trades at junk prices today. As President, he grew the size of our National Debt with the clear intention of buying it back at below face value.

The current Administration seeks to increase its union workers voter support, mostly in Northern states. The party in power is simultaneously trying to reduce the economic power of other states through taxes, tariffs, contracts, and anti-trust policies. They hope people will not see the devaluation of their hard-earned money in the financial press, although they will see higher prices at the grocery store. Much of the inflation results from the cost of transportation of goods and services, with the price of oil rising from below $20 to about $80 a barrel. This was caused by closing pipelines, preventing drilling on federal lands, and other such measures. Consequently, the US is no longer energy-independent and relies on expensive foreign oil being shipped into the US.


Six Day Tally

I don’t know what future prices and fund net asset values will be. However, the dichotomy in results through Thursday is cause for concern. These results exclude a further significant decline on Friday. The following list of comparisons may be of interest to those trying to make sense of the US stock market:

  1. The JOC-ECRI Industrial Price Index performance year over year is +32.15%.
  2. The AAII sample survey summary predicts no direction, with bullish, bearish, and neutral all about 33%.
  3. The Barron’s Confidence Index projection of future performance shot way up, favoring bonds over stocks.
  4. 2/3rds of weekly WSJ prices for stocks, bonds, ETFs, currencies, and commodities fell.
  5. While the NASDAQ declined -4.53%, S&P Small-Caps only fell -1.23%.
  6. The average Value fund rose +0.98%, while the average Growth fund fell -3.65%.
  7. Only 2 of 31 fixed income fund peer averages rose.
  8. Only 1 of the 25 largest equity funds rose. 
  9. In December, 8 of 11 equally weighted S&P sectors beat the capital weighted indices. Only 10 of 50 S&P global indices gained 20% or more in 2021.

This suggests to me that 2022 is going to be a difficult year. 


What do you think?

  



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

https://mikelipper.blogspot.com/2022/01/mike-lippers-monday-morning-musings.html


https://mikelipper.blogspot.com/2021/12/are-investors-taking-too-much.html


https://mikelipper.blogspot.com/2021/12/mike-lippers-monday-morning-musings.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.




Sunday, October 31, 2021

Securities Analysis as Taught Leads to Volatility - Weekly Blog # 705

 



Mike Lipper’s Monday Morning Musings


Securities Analysis as Taught Leads to Volatility


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




The long-term history of making money in the market is not  following the majority  with their money. In simple terms, choosing not to conform with what others are doing. Winning in the market means converting some of the wealth of others, often the majority, to our own. This maneuver requires using different approaches and tools than others use.

 

Sector Bets Fail to Produce Top Results

The academic course on Securities Analysis is taught as a companion course to accounting, or worse, macro-economics. Both work on past history and have precious little to do with future movements of companies, stocks, or economies. More useful studies would instead focus on profits and securities. 

All too often securities selection processes screen for companies which appear to be in the same industry, as measured by misleading government data. As a junior analyst I was assigned the steel industry. I quickly discovered that although the number of steel companies was small, it was a mixed bag of companies. You could divide the group by the location of their headquarters and proximity to critical resources, usually coal, or to a growing customer base. In this case an investor did far better with Inland Steel, based in steel-short Chicago, rather than in Pittsburg and West Virginia coal country. 

Another worthwhile distinction was the cost and quality of labor. In the early days of the externalization of producing payrolls, commercial banks were prominent. However, overtime they lost market share and eventually lost the entire market to independent payroll service providers who provided better services. They provided more help filing payroll tax returns and offered lower prices, due to their labor not being paid bank-type overhead. Today the payroll market is dominated by service companies with extensive and modern computer systems, which are good at servicing. (Our accounts own ADP.)

A final example is computers. Many of the large industrial companies manufactured the early computers, the biggest and best being IBM, a stock my grandparents owned. The key to their success was not only adequate technology, but superior leasing prices and great sales engineers. IBM’s top salesman regularly presented to Wall Street and was a missionary sales person. However, the industry changed from massive main frames taking up large airconditioned rooms, to desktop personal computers whose parts could be produced in low-cost regions of the world and could be assembled elsewhere. 

Dell started out by taking customer orders for computers which could be customize and air shipped to customers. Today, many believe Apple (owned in our accounts) is the leading company. This is the result of the late Steve Jobs’ focus on style and ease of use. His most important achievement however was handpicking his successor, Tim Cook, an expert known for supply management and development. What relatively few investors appreciate is its global network of Apple Stores and a growing mail order business generating repeat business, essentially building its own annuity business. (Remember, US automakers had market level price/earnings ratios when customers replaced cars every three years with newer models.)

Less popular ways of analyzing securities included: 

  • Paying more attention to insufficient supply than excess demand.
  • Focusing on differences in manufacturing approaches and costs.
  • Understanding the personalities of key operational people vs known leaders and their educational biases.


We Don’t Create Winners, Losers Do

No matter how prescient and bright we are, to have great results we need others to create attractive entry prices and unreasonably excessive exit prices. Utilizing these as working assumptions, I am getting nervous about the flow of institutional and individual money in private equity/debt (private capital). For many years there were more good private companies offering participation in their attractive futures than potential investors. They attracted investors with relatively low entry prices. 

Recently we have seen a reversal, with a huge flows of institutional and individual money seeking to exit the public markets and enter the private markets. By definition, entry prices either directly rose or the firms had to carry senior debt prior to generating private capital returns. There is so much reversal of traditional roles that one of the oldest buyout firms, with a great long-term record, is converting some of their US and European investments to a publicly traded fund. For some of its investments Sequoia is trading up in liquidity.

One of the disturbing concerns in the privates market is the number of new advisers that have entered the market. They have increased the number of funds and are spreading the investment talent more thinly. In response, T. Rowe Price, an experienced investor in privates, is buying an existing manager to get the necessary talent in an increasingly competitive market. (Owned in Financial Services Fund accounts)

A number of well-known university and institutional portfolios have announced performance in excess of 40% for the fiscal year ended June 30. Some are probably reporting private investments with at least a quarter’s lag. (My guess is performance for the year ended March was better than the year ended June 30.) Most investors did not do as well and consequently some are likely to pile into an overheated private market with scarce investment talent. The history of investment returns is that it is extremely rare to find a manager who can consistently return over 20%, which is roughly three times the growth of industrial profits. The organizations that reported 40%+ profits undoubtedly benefitted from lower entry prices and better terms than is currently on offer. 

I am a long-term member of the investment committee of Caltech, an internally managed investment account with a talented staff. They have put a cap on their exposure to buyouts and venture capital. I applaud this decision because of the history of hedge fund performance. It shows that even very good hedge funds suffer when a minority of hedge funds experience serious liquidity problems. This was in part because of debt, but some of their holdings were also owned by trading interests desperate to liquidate some of their excessively leveraged holdings created by falling prices. This is a classic example of others causing some investors to have poor results.

Moody’s is also concerned about the rapid growth of inexperienced managers offering private capital vehicles. The credit-rater was criticized for the exponential growth of CMOs. (Moody’s recovered, and just this week was selling at a record stock price. Moody’s is owned in our managed and personal accounts.)


Historical Odds of Equity Bear Market

There is wisdom in the saying that history does not repeat (exactly), but rhymes. The ebb and flow of markets are driven by emotional excesses, with investors reacting to various stimuluses. I previously mentioned a successful pension fund manager liquidating his equity portfolio after it gained 20% in a calendar year, reinvesting the proceeds at the beginning of the next year. He produced a record absent of large losses, with reasonably good gains on the upside.

We may be approaching a “rhyming event”. I feel more confident taking a contradictory view when it is supported by large scale numbers. The US Diversified Equity Funds (USDE) have combined total net assets of $12.4 Trillion, representing 2/3rds of the aggregate assets in equity funds. According to my old firm’s weekly report, the year-to-date average gain was +21.01%, vs a 3-year average gain of +19.21%, and a 5-year average of +16.76%. More concerning is only 4 of the 18 separate investment objectives within the USDE bucket produced over 20% 5-year annualized growth rates. Of the 14 Sector Equity funds, only 2 grew +20%, and only the World Sector Fund average gained 20%+. At the individual fund level, only 3 of the 25 largest funds produced 20% growth rates. During the same 5-year period, the average taxable fixed income fund gained 3.34%, and the average high yield bond fund grew 5.47%.

Recently, a number of endowments reported gains of over 40% for their June Fiscal years, driven by successful private equity/venture capital investments. Some of these private investments were reported on a logged basis. Remember, in many cases they had spectacular performance through March, and have been relatively flat since then.

The cyclical nature of human emotions suggests that when earnings growth does not support lofty valuations, we are likely to have a “rhyming event”.


What do you think? 




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

https://mikelipper.blogspot.com/2021/10/are-we-listening-as-history-is.html


https://mikelipper.blogspot.com/2021/10/guessing-what-too-quiet-stock-markets.html


https://mikelipper.blogspot.com/2021/10/what-is-problem-weekly-blog-702.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.