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:
- This week’s high/low prices were 548/168 for the NYSE vs 411/393 for the NASDAQ (Enthusiasm/Caution)
- Friday’s percentage of advances were 85% for the NYSE vs 68% for the NASDAQ (Winners are less happy)
- The weekly AAII bearish sentiment increased to 31% from 25% the prior week.
- 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)
- 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
- The White House is preparing to introduce a Corporate Alternative Minimum Tax (CAMT) of 15%, which is unlikely to pass the next Congress.
- Both Presidential candidates are pro inflation in action, if not in words.
- 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.)
- 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?
Did you miss my blog last week? Click here to read.
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