Mike
Lipper’s Monday Morning Musings
“Straws
in the Wind”: Predictions?
Editors: Frank Harrison 1997-2018,
Hylton Phillips-Page 2018
Predictions
Ever since humans have thought about the future, they’ve
looked for clues about what the future might hold. Since very few stocks can be
purchased and converted back into cash immediately with a profit on the first transaction
day, equity investors are essentially betting on one or more perceived futures.
All we can do is guess what may happen.
Since regulators frown on future predictions, particularly
those that guarantee future events, investors and analysts scan both the past
and views of the future to guess what may happen. The following are brief
thoughts which may help subscribers think about the future.
From the Past
In 1934, the US Congress passed the Reciprocal Trade
Agreement Act giving the President (FDR) the ability to negotiate reciprocal
trade reductions. (FDR, with the help of his “Harvard Brain Trust”, was
authorized to accomplish this mission. While they proposed tactics from the
left, the current President may draw his approaches from the right. Both could
be labeled “activists”.)
Today, the History Channel showed a two-hour program devoted
to The Crash, The Depression, and FDR's actions. It was well produced, simplistic,
and narrow, but the key facts seem to be accurate.
- FDR's 1932 Presidential election had surprising support from Republican leaders J.P. Morgan Jr. and DuPont, the leader of GM.
- FDR blamed the Crash and subsequent Depression on Wall Street and Banks.
- FDR turned on them, which changed the way the economy worked.
- The economy was not in condition to fight WWII at the beginning of the war.
As we have been told "History does not repeat itself,
but rhymes." In general, there are two types of recessions, cyclical and
structural. The latter takes longer.
2025
A year ago, very few analysts and perceptive investors would
have guessed which four mutual fund peer groups would now be leading the
year-to-date race. They are Precious Metals Funds +42.95%, Latin American Funds
+24.50%, Commoditized Precious Metals Funds +22.60%, and European Region Funds +20.61%.
The first and third are clearly based on gold, but the gap between the two appears
to be unusually wide. Latin American and European funds having similar
performance also seems unusual. From an
overall point of view these results suggest we have entered a new phase or
cycle, with the probability that last year’s leaders won’t lead again for a
while.
There now appears to be a need to fill manufacturing jobs on
an overall basis. This is distressing for two reasons. The first is that hirers
can’t find the right people who want to work in their plants. The second is
that the new factories this administration is counting on will have difficulty
reaching the productivity and profitability levels the optimistic people in DC
expect.
The London Stock Exchange regularly publishes I/B/E/S
estimates of S&P 500 quarterly earnings. For the quarter we are in, their
earnings per share prediction is that we will gain +5.8%, while growing net
income +4.3%. The +5.8% is disappointing, but the +4.3% shows how much the
market needs buybacks. Moving to economic analysis from securities analysis,
the low gains in net income will not generate sufficient cash to pay for
capital expansion and the introduction of new products and services.
The weekly American Association of Individual Investors
(AAII) sample survey has recently turned slightly bullish, quite a jump in
three weeks. The latest week bullish/bearish readings are 37.7% and 36.7%,
compared to 29.4% and 51.5% three weeks ago. Two comments are appropriate. First,
this time-series has a good long-term record, although it has been wrong at
turning points. Second, individual investors should not be traders who get caught
up in short-term volatility.
2026
Venture Capital funds are having difficulty raising capital
from investors and lenders. I suspect this is also true for the broader universe
of private capital funds. Investors in small and mid-cap equity funds have become
used to private capital funds buying their maturing holdings.
One commentator wrote that Warren Buffett’s Berkshire (*) sold
bank stocks and has not sold any of its positions in Apple (*), Coke, and
American Express (*) in its latest report. These stocks are price leaders and should
therefore do relatively well in periods of stagflation.
(*) Positions held in client and personal accounts.
Question: What will make you transact this year?
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Mike
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