Are Investors Seeing a Change? Politicos Are Not - Weekly Blog # 919

 

 

 

Mike Lipper’s Monday Morning Musings

 

Are Investors Seeing a Change?

Politicos Are Not

 

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

 

 

 

Was the latest week instructive?

During the low volume week: the DJIA fell -0.51%, the S&P 500 fell -1.07% and the NASDAQ fell -1.69%. One does not know a trend is over until a meaningful reversal of direction has occurred, which quite possibly was the case this week. On the NASDAQ there were more decliners than gainers, unlike the “Big Board” where there were more gainers. However, since the April 8th bottom, the NASDAQ Composite Index has led the US general stock market, gaining +51.92% compared to +37.02% for the S&P 500 and +28.72% for the DJIA.

 

The supporters of the political party that currently occupies leadership in both chambers and the White House cheer these recoveries but appear to ignore other data. For example, real private non-residential fixed income investments, excluding data centers, have been flat since 2020 and is far behind 2023 prices.

 

The Real Problem is Bad Debt Creation

For the “bulls” to be proven right, a large portion of the public’s uninvested money must be corralled to invest in the economy, in sufficient amounts necessary to generate the tax revenues required to support government spending and address the growth of the deficit. Instead, they are doing this by removing the Controller of the Currency and the leverage lending guidelines of the Federal Deposit Insurance Corporation (FDIC), which they felt were too restrictive. To add more fuel to risk capital they are encouraging retail investors to put some of their retirement income savings into private debt investments, even though there has been an increase in bankruptcies over the last four years.

 

Economic Tailwinds

Optimist believe the economy should have the wind at its back in 2026 due to the following positive events resulting from the “Big Beautiful Bill”. However, it remains to be seen whether these events translate into additional stock market gains or if these events are already reflected in current market prices. Some of these events could also be negatively impacted by Supreme Court decisions on tariffs.

• A relatively large number of taxpayers will see tax reductions in 2026, with some seeing tax refunds early in the year.
• Reduced regulations should decrease the cost of doing business and speed up the introduction of products to market.
• The reshoring commitment of over $18 trillion in manufacturing capacity should boost construction and the jobs required for that task.
• AI capacity construction should continue throughout most of 2026.
• Energy capacity construction will likely increase in 2026, with the introduction of small-scale nuclear power and construction of a new natural gas pipeline from Pennsylvania to New York.
• The House of Representatives passed a $900 billion military budget, which includes pay raises and an increase in defense spending. This bill still needs to go through the Senate before it becomes law. Some of these funds will be used to retool the military for modern warfare, which includes increased use of AI and unmanned vehicles.

Various underwriters are predicting that equity markets will generate double digit rates of return. On a long-term basis this is extremely difficult to do and can only be achieved by accepting the risk of periodic losses. By year end the year the S&P 500 Index could see its third consecutive year of annual gains exceeding 20%. Only once, from 1995-1998, has the market seen a 4-year period of consecutive annual gains of 20%.

 

Bottom line: Be Careful

 

 

 

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Mike Lipper's Blog: On The Way To Casualties & Eventually Riches - Weekly Blog # 918

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A Different Year End Blog: Looking Forward - Weekly Blog # 869

 

 

 

Mike Lipper’s Monday Morning Musings

 

A Different Year End Blog: Looking Forward

 

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

 

 

 

Using Mutual Fund Data for Other Investors

Mutual Funds reveal their investment performance to the public every trading day and reveal their portfolios quarterly. In many cases the funds are managed by large investment managers responsible for other accounts. Their portfolios by implication reveal some of their philosophy of investing for other accounts.

 

Each week the London Stock Exchange Group publishes fund data that I used to produce. The report tracks 103 equity fund or equity related fund peer groups. Using the last five years of data, the shortest time period one should use in assessing investment performance, only 17 peer groups beat the +14.58% five-year return of the average S&P 500 index. (In selecting funds, I prefer to use 10 years.) There were three peer groups that did better than the S&P 500 Funds Index:

• Science & Technology +17.72 %
• Large-Cap Growth +16.62%
• Energy MLP +14.64%

Remember these are averages, so within the peer group some funds did better or worse than their group average. With only 16.5% of the groups beating the index, I question whether we are preparing a base for a meaningful general stock market advance.

 

Current Structure of the Market

The last four trading days of last week may not be significant but could be. The next two trading days will probably be dominated by last-minute tax-oriented transactions initiated by market makers or late players.

 

In the last four days 49.4% of the shares on the NYSE rose, while 55.8% rose on the NASDAQ. The more bullish NASDAQ players generated 205 new highs, compared to only 73 on the NYSE. Investors participating in the weekly AAII sample survey have been moving toward neutral in the last three weeks. Three weeks ago, the Bulls represented 43.9%, but they only represent 37.5% in the current week. The Bears only increased by 2.4% to 34.1%.

 

Possible Longer-Term Signals

Both political parties feel they should direct the private sector to a much greater degree than in the past. The latest example of this is the FDIC, which has wrung an agreement from the NASDAQ to limit the amount of ownership in small and regional banks. This a long echo of the “Money Panic of 1907” that Mr. Morgan solved in his locked library, which led to the creation of the Federal Reserve. A generation later the US government realized the Fed couldn’t help local farmers, their banks, and suppliers, so they passed the Smoot Hawley tariff bill, which was reluctantly signed by President Hoover.

 

Both the good and bad leaders of many countries recognize that the US has not won a war since WWII. Consequently, the growth of China in many fields is disturbing. Tariffs may protect some US businesses at a huge cost to lower income consumers and eventually isolate the US from growing markets, diminishing our military strength.

 

These issues and others are what we will be dealing with in the new cycle we have entered.

 

We wish you, your family, and friends a healthy, happy, and prosperous New Year.

 

 

 

 

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Early Stages of a New Grand Cycle? - Weekly Blog # 781

 

Mike Lipper’s Monday Morning Musings

Early Stages of a New Grand Cycle?

 

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

 

 

 

Travelers Note:

Many who speak of future seminal changes don’t recognize where they are. This is understandable, as it is difficult to identify where we are in the development of trends, let alone where we are going.

 

Whether or not you agree with my perceptions, they may be useful to you in gauging where we are in the progress of time. Please share your views with me. You can’t avoid thinking about the future if you invest in securities. But by not investing at all you are letting others decide you and your family’s fate. No investment isn’t an investment.

 

Reliance on History

The main tool we have in thinking about the future is our perception about our collective past. We selectively use our less than completely accurate perceptions of the past in projecting our futures. While our learned or experienced views of the future can be helpful, they won’t give us a completely accurate map of the future.

 

The worst remembrance that some seniors have is a period labeled the “Great Depression”. In thinking about the future, my analytical training suggests that this is a useful model for the worst that might befall us. We hope we can survive a similar period and therefore we can deal with whatever may come.

 

Where are We?

Remember this question when traveling with young children? We may remember a partially inaccurate statement from a nearby authority-figure making a guess. This was not an attempt to misinform, but a quick estimation of what was known or believed. We do the same today in addressing the future, using a selection of factoids that lead to a satisfactory conclusion. I follow this learned pattern.

 

When I look at the array of information before us today, the following elements are part of my thinking:

• The best single predictor of the future by a mass of decision-making people is the general price trend in various US markets, utilizing the median performance of US Diversified Equity  Funds (USDEF). Measuring from the peak on 2/19/20 to last Thursday, there was a compound gain of +5.93%. (True, from a subsequent bottom on 3/23/20 the gain was +23.31%.) However, for the last 2 years the average USDEF lost -1.14%. These are pretax and pre-inflationary returns. Obviously, retirement capital during this period was not augmented by positive real performance. For the last 52 weeks, results were even worse -6.59%. In the current year through Thursday, 7 out of 108 fund peer groups lost money, with the same number gaining over +10%. I am guessing the median fund probably produced about +5%, adding little to retirement accounts after taxes and inflation.
• Perhaps the most depressing news came over the weekend in a NY Times column titled “Why Money Market Funds are now Leading the Pack”. They are referring to money funds attracting more assets than any other type of fund. This is typical of a bottom, which comes at the end of investment cycle before a new cycle begins.
• These two elements suggest a lot of investors, both individual and institutional, expect a lengthy period of stagflation. We have had two extended periods of stagflation, during the depression and during portions of the 1970s and 1980s.
• Today we are seeing two types of behaviors we saw during the Depression.
• Empty apartments or floors being temporarily used for parties or other short-term uses.
• Broadway shows picturing past happier times.
• Last week 8.8% of NASDAQ listed stocks hit new lows vs. 2.9% for the NYSE. The NASDAQ led the NYSE on the way up and is still up +17.15% year to date. We should consequently expect it to lead going down.
• There are another two Depression era trends currently reappearing. A speed up in the replacement of CEOs and new ways of doing business. Apple* is an example of the latter. They are offering a cash savings account, not an insured deposit relationship. During the Depression, FDR started the FDIC to protect the bank assets of small depositors. While most people thought the accounts were backed directly by the government, losses were socialized by the remaining banks when the FDIC bailed out the banks. (This privatized the loss in the same way JP Morgan did in the 1907 Trust company panic.) Apple’s current move is backed by Apple, the largest company by US market capitalization. 

*Shares in Apple and Berkshire Hathaway are owned in personal and client accounts. Apple shares are the largest public investment owned by Berkshire Hathaway.

• Inflation is caused by excess demand not being consumed by the domestic economy. Throughout history wars have contributed to inflation, as the government spends money not supplied by the domestic economy. Spending on climate change, poverty, and similar expenditures also add to inflation. Short-term interest rates only directly impact short-term borrowing, having only a modest impact on national inflation.

 

Working Conclusion

While it is not absolutely certain we will have a major economic decline, it shouldn’t be discounted.

 

After depressions there is always an expansion to look forward to.

 

Thoughts?

 

 

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What To Believe? - Weekly Blog # 778

Mike Lipper’s Monday Morning Musings

What To Believe?

 

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

 

 

Preface: Publishing with Intent 

One of the most useful screens used by investigators is guessing the primary intent of what is being offered by the supplier. The most likely intent is to get important consumers to take a specific action, or possibly to not act at all. When addressing an audience of one or more there is a presumption that the “pitch” is to reinforce already accepted consumer beliefs. This is a much more productive strategy for the publisher, as most “pitches” are designed to get the highest number to agree. 

 

As someone who learned to analyze at the racetrack, I feel the need to understand how the majority of the money is thinking about a particular horse, in a particular race, on a specific day and time. That horse is likely to have the most money bet on a projected result. The horse in each race with the biggest bet is labeled “the favorite”. The favorite has the largest percentage of the betting pool and by definition the smallest payoff odds. Favorites generally win more frequently than all other entries. However, they typically win less than half the time, in only about a third of the races. Thus, betting on the favorites does not generally produce enough dollars to make up for the losses in an eight or nine race card day.  

 

This has led me to a mindset of respecting the majority opinion, while choosing to either not bet at all, or to choose a horse favored less than the favorite. This approach has worked sufficiently well that I on occasion use it to bet on securities, choosing non-favorites or outsiders. 

 

This betting technique led me to look through the bulk of the information to understand where most of the money was being bet and if other choices made more sense. I have become a skeptic, which impacts my assessment of the media’s review of the first quarter equity results. 

 

The Favorites View of 1st Quarter Results 

 (N.B. The less than perfect technique of looking past performance for clues as to future results, or at least a better understanding of what is likely to happen.) 

 

These thoughts were before OPEC+ announced a million barrel per day cut and more later.

 

The first quarter of 2023 was viewed as victory for the stock market, with the NASDAQ Composite gaining +18.6 % from the beginning of 2023.  

 

(This view is what should separate the amateurs from the professionals. Markets move to their own rhythm, not to a stated calendar. Like many other market analysts, I measure markets from their highest to their lowest points. The record highest price for the NASDAQ Composite was achieved November 19th, 2022. If one looks at the change from the peak to the close in the quarter, the NASDAQ Composite is down -23.84%. This is significant, because some in the media are calling it a new bull market. I don’t think so, at least not yet.) 

 

There are at least two other statistical ways to see if we are on the immediate edge of a bull market.

1. The number of advances and declines in the last week. There was only one day in the week where there were more advances than declines on the NYSE, and only two on the NASDAQ.
2. Another way to look at advances vs. declines is to look at the percentage of listed stocks that were down for the week. On the “Big Board” 12.57% hit new lows, vs. 17.01% on the NASDAQ. (These are relatively high for the beginning of a new bull market.) 

Many market prognosticators believe a new market phase will be led by different stocks than in the past. For the month of March, the S&P 500 gained +3.67%, although the equally weighted S&P 500 lost -0.88%. The S&P 400 (Mid-cap) lost -3.21% and the S&P 600 (Small-cap) lost -5.16%. (Standard & Poor’s does have an S&P Asia 50 Index, which was up +6.05% in March. 

 

Big Risk: Correction Delayed 

While I doubt we will escape a recession between now and the next Presidential election, we may. However, much more concerning to long-term investors is the need to make major corrections in the economy and society. The following is a list of issues that need to be addressed: 

1. The Federal government needs to stop creating more inflation. It needs to cut expenses and lower restrictions on businesses, which hurt low-income people. For example, reshoring raises the costs to consumers. The bailout of banks through the FDIC raises bank fees, which in turn will lead to fewer low-priced services. Restrictions on energy pipelines increase the cost of almost everything that is transported, even before Sunday’s announcements.
2. Encourage IPOs – Only one of the last 20 Global IPOs was in US dollars, 12 were priced in Chinese Renminbi. 
3. Global lending is down -28% to a 7-year low. Acquisition related financing is down -71%, to 13-year low.
4. Improve management selection in government, non-profits, and business – Choose people with superior operational rather than political skills.

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Question of the Week: Have You Identified the Upside for you?  

 

 

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Can’t Find Totally Risk-less Conditions - Weekly Blog #775

 

Mike Lipper’s Monday Morning Musings

Can’t Find Totally Risk-less Conditions

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

 

  

 

 

A Real-World Problem for Investors

Investors turn to advisors to get assurances that they are not taking risks with their money and their future. We can discuss the numerous risks of losing some or all of their money and should do so. But the news of Silicon Valley Bank (SVB) being forced to close and then taken over by the FDIC shows that these types of discussions were not had.

 

This weekend I spent considerable time thinking about “risklessness” and concluded that it does not absolutely exist, nor can there be such an asset in an absolute sense. There are known and unknown opportunities to lose all or some value of an asset.

 

The reason is that we do not live in a one-dimensional world where all is known, or unknown conditions exist. We and our assets exist in multiple dimensions. Few if any of the investors who sold securities in an IPO and deposited the cash proceeds in SVB were waiting for an opportunity to buy appropriate assets. I suspect most investors felt their cash was being held at one or more underwriters for a short period, not at a corporate depository.

 

If they considered it at all, they were pleased that their assets in the company were unencumbered by loans. My guess is that they never considered they were at risk of a “run on the bank” by unrelated depositors. But such a run happened, putting the bank in an insolvent condition, which led to bankruptcy.

 

Ecology

While it may come as a surprise, some investors were concerned about changing climate conditions many years ago. They felt it was not being appropriately considered by institutional investors in making investment decisions. The “buzz” word at the time was ecology. Which meant that if something changed, more things could change.

 

Today’s investors should dust off the old studies on ecology. A current example might be a military battle in the Ukraine causing the price of flour to rise in Egypt, which in turn factors in the price of Mideast oil rising, which in turn impacts gasoline prices in middle America and consequently the prices of local homes in the Midwest.

 

The World View

Today, every consumer and investor is a globalist, whether he or she likes it or not. This impacts transaction prices for everything he or she does, including wages and taxes. Funds that invest in Europe are increasing in price as they attract flows from America, where prices of US dominated funds are going down, leading to a decline in purchasing power for the US dollar.

 

US Investors vs Washington Politicians

The current administration in Washington has proposed raising taxes while continuing to curtail domestic production of goods and services. This will add to inflation as the world continues to fund a major war. Similar to society turning its back on climate and ecology years ago, which resulted in today’s conditions. Our government is pro inflation through restraint of trade and raising prices.

 

Last Week: Another Warning ex SVB

While most of the financial headlines on Thursday and Friday were focused on the implications of SVB, there was worse long run news for American investors, consumers, and citizens. The Standard & Poor’s 500 declined -1.58% for the week ended Thursday, similar to its performance for many prior weeks. However, the depressing news was that China Regional Funds, the largest contributor to world growth, had declined -6.31%. While China exports more than its imports, the major exporter to China is the US. If the US is going to get out of its near recessionary condition, it will need to export a lot of US products and services.

 

What Are We Looking For?

Last week there was significant weakening of market conditions. While paying close attention to present conditions, we are nevertheless searching for the stocks and managers that will participate and, in some cases, lead the next significant “bull” market. We are in the early stages of our search and it’s still conceivable we may go through a longer period of stagnation. We are searching for the kind of corporate leadership and product/services that demonstrate superiority. Some may be overseas, but many will come from the US. Please help us.    

 

 

 

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Contact author for limited redistribution permission.