A Good Time to Sell? - Weekly Blog # 910

 

 

 

Mike Lipper’s Monday Morning Musings

 

A Good Time to Sell?

 

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

 

 Selling is More Important

When an investor, distinct from a trader, asks me if they should sell some portion or all of their holdings, I first try to determine the critical time period in judging the results of the action. If one is persuaded by media voices the answer will usually be tomorrow or at the end of the calendar year. For me, it is when the money is expected to be needed. For example, for my newborn great grandchildren's retirement or the replacement of the new university dorm, it could be a 100-years. Another matrix could be the future low price point needed to protect future funding of a desired goal.

 

Regarding a future low price point, it is important to recognize that prices move in cycles. The important cycles can be labeled as seasonal, cyclical, secular, and structural. It is how I think of the latter part of last week’s drop in prices, where what I follow fell -15% to gains of +7%. To conserve your time and the blog's space I will comment on the year-to-date period for those impressed with media voices and include some other screens as well.

 

The first thing that hit me was the largest average gain of +15.94% in non-leveraged, diversified large growth mutual funds. These gains were driven by the biggest positions in technology stocks. However, they missed out by focusing on securities registered with the Securities Exchange Commission. After many years of SEC registered stocks performing very well, there were some foreign markets that generated much better performance multiples. The leading countries were Ghana +130.25%, Cyprus +94.75%, Luxembourg +74.8%, Greece +71.45%, Columbia +70.05%, Nigeria +65.1%, Korea +61.1%, South Africa +48.02%, China +32.85% and Chile +31.02%. Weekly Barron's performance charts showing 14 European and 7 Asian countries had 7 Asian and 4 European indices gaining. (As an analyst that has followed non-US stocks and invested in some, I believe this is a good time to examine these opportunities.)

 

Most Analysts Focus on Rising Stocks

I glanced at those stock prices not doing so well. For example, the Dow Jones Industrials (DJIA) and Dow Jones Transportation (DJTA) stocks fell -2.739 and -4.88% respectively for the week. Perhaps more importantly, their year-to-date performance results were +6.90% and -5.21% respectively. (This suggests the US goods economy is not doing well. Tariffs could be a problem. Freight movement is down for both the rail and truck business and may forecast Halloween and Christmas sales being behind earlier expectations.)

 

Down Prices = Opportunities

Three industry sectors are showing small declines on a year-to-date basis: Banks -4.26%, Insurance -1.64% and small companies -1.1%. Restrictions on all companies are the same, but small companies may be impacted more due to their staff size. To the extent the current administration reduces some of the regulatory overhead, it cou1d restore a competitive advantage to smaller companies. However, many restrictions on smaller financial and insurance companies appear to make it easier for new entrants.

 

AI, An Unrecognized National Problem

Some are beginning to comment on the absence of large profits from Artificial Intelligence companies due to lack of public discovery of relevant financial disclosure, so I will not. At a recent meeting hosted by the London Stock Exchange Group, one of their headline speakers noted that the challenge for the AI industry was to produce "more with less". It is well recognized that AI is taking over an unidentified number of job functions, reducing the need for human labor. Great! Where are these laid off people going to get jobs anywhere near similar wages? This could be a concern for future Administrations. 

 

The 4th Activist President

Just like Andrew Jackson and the two Roosevelts, President Trump is trying to solve various national problems by changing how they are handled. Some of these attempts will survive the Courts. What I am not seeing is how the restructuring of the economy will work. Looking at the aftereffects of prior activist Presidents, I suspect it will materially change the outlook for investments, something people are not currently focusing on.

 

I would like to know if anyone has any thoughts on what restructuring will mean to their investment orientation.

  

 

 

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

Mike Lipper's Blog: Tactical Headlines Show Strategic Clues - Weekly Blog # 908

Mike Lipper's Blog: Anticipation Pays; Deliveries May Not - Weekly Blog # 907

Mike Lipper's Blog: Selected and Casual Road Notes - Weekly Blog # 906

 

 

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 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

 

How to Find the Answer - Weekly Blog # 810

 

Mike Lipper’s Monday Morning Musings

 

How to Find the Answer

 

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

 

 

First, recognize that one does not have the answer to the problem. In my case, and for most others, I do not know what the future holds for the world, our economy, the “market”, or my accounts and my investments. Second, search for a source of greater knowledge. Taking from the folklore of the racetrack, “smart money”, a guide to an advantaged decision.

 

The term smart money comes from the Damon Runyon era, when private bookmakers gave odds and took bets on horseraces. The odds that they quoted were the odds the bettor received if they happened to win. This was the traditional way of doing things in Great Britain and other places. In the US, various state governments saw a way to generate revenue from betting activities. They required the tracks to pay them a relatively small portion of the winning bets, alongside what the tracks themselves charged, for a combined total “take” of around 15% of the winnings.

 

Illegal bookmakers offered two services, taking bets over the phone and rather being forced to attend the track, running a banking operation by extending credit to the bettors. If the money bet by their customers was differently balanced than the money bet at the track, the bookies might not have enough customer money to meet the winners’ expected payments. To reduce this risk, the bookies evaluated their exposure late in the 30 minutes before each race. They then communicated to a trackside associate to bet enough money on the probable winner to reduce the likely payoff odds to an amount they could afford. The minute this balancing operation was activated, it became visible on the tote boards. Some would recognize what was happening and choose to join the so-called “smart money”. Riding on someone else’s thoughts sometimes pays off.

 

Applying the Smart Money Approach

Each week I scan both the volume of shares and how they are divided between rising or falling on the NYSE and NASDAQ. I pay particular attention to any meaningful difference between the two major marketplaces.

 

The media proclaimed this past week a rising market because the three major stock market indices rose. However, there were more shares sold at declining prices than at rising prices. The New York Stock Exchange gets more media attention than the NASDAQ because the dollar value of shares listed is larger than that on the NASDAQ. However, some of the volume on the NYSE is not as professionally managed as that on the NASDAQ market. (The NYSE has more individual investors and more institutions with smaller and less competent research staff). In the latest week, 70% of the NYSE declined vs 64% on the NASDAQ.

 

The smaller decline is likely due to more growth-oriented stocks trading on the NASDAQ. Also, the big market-cap energy companies trade on the “big board”. (In the week ended Thursday, mutual funds primarily invested in natural resources fell -5.62%, while growth stock funds gained +2.69% on average.

 

Accumulation or Distribution

Another attempt to find “Smart Money” is technical, market, or price analysis. The theory is that smart money acquires (buys) investments when they are cheap and distributes (sells) them when they are overpriced. Few investors openly declare what they are doing.

 

Many market participants can be labeled as either optimistic or pessimistic. For the most part optimists believe many of the problems facing us will be addressed successfully in the near-term, usually in under one year. They are buying because in part they believe that near-term earnings will rise. The pessimists don’t have confidence in the near-term, they believe there is still near-term risk at current stock price levels.

 

If one quickly divides most stocks into growth and value, there were two new elements revealed this week. The weekly report on US rail (freight) traffic fell 1.7% on a year over year basis. Seven out of ten types of freight declined for the week, with only three rising. Visits to various shops show that many items are no longer being carried.  Smaller in terms of direct economic impact but psychologically more important is Apple’s (*) announcement that they are raising trade-in prices for old devices, including Androids. They are doing this to aid sales of their own phones, while perhaps supplying the overseas market with cheaper phones, particularly India.

*Owned and managed and personal accounts

 

Lessons from History

There are many lessons from the Depression we continue today, such as the almost guaranteed death and debts of WWII. As a Marine I am very aware that the best and perhaps only way to achieve long-lasting peace is to prepare for war, which we are not.

 

A second lesson from someone who is older than the two leading candidates for the US Presidency is that their ages should not be the main reasons to approve their second chances. Their history as young and not so young men is enough to disqualify them. More important is that our political system allows them to be candidates which we should correct. There are many senior people older than the two “young seniors”, like Charlie Munger who could do a better job.   

 

 

 

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

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

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

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

 

 

 

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 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Falling Confidence Beats Numbers but be Careful With 2nd Quarter GDP - Weekly Blog # 734

                                    

Mike Lipper’s Monday Morning Musings

Falling Confidence Beats Numbers, 

but be Careful With 2nd Quarter GDP

———————

Is a Structural Recession Coming?

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

Managing the News

The classical definition of a recession is two consecutive quarters of negative GDP. The first report for the first quarter indicated a decline of 1.4%. This was the headline, although the remaining bulls focused on subsequent reports adjusting first quarter results to a positive number that never made it into the conciseness of the market. Perhaps the message the market has taken is that this Administration is tone deaf. The White House had an afternoon and an evening to manage the news through its obedient media but failed to bolster confidence in the Obama team’s overall competence. It will be interesting to see how the second quarter GDP is handled after the July 4th holiday. If like the first quarter it is a negative, which looks more likely than not, the definition of two consecutive negative quarters representing a recession, may be viewed by some as fulfilled. If not, we may have to wait for an October surprise.

Current Pictures

Racetrack handicappers hope to find “smart money” to give them an edge. Two suggestions - Transportation and Speculators vs. Investor timing.

Transportation: One of the earliest stock market signals led to the Dow Theory, which states that a trend is likely to continue if the performance of the Dow Jones Industrial Average (DJIA) is confirmed by the trend of the Dow Jones Transportation Average (Rails) and visa-versa. The theory was based on industrial shares being more future oriented and rails representing freight that was actually sold. Applying this thought to the week’s performance. After 8 weeks of the DJIA declining, it was up 3 out of 5 days. However, the Dow Transportation Average was down 3 days this week.  This makes sense to me considering US rail traffic was down 5.4% this week. Of the 10 classes of freight, 7 were down and only 3 were up.

Market performance depends on which forces are dominant. Generally, there are more long-term investors owning shares traded on the NYSE than the more speculative holders that invest in the NASDAQ listed stocks. Larger passive index funds are more significant owners of “Big Board” shares. In terms of share volume for the week, only 47% of the NYSE shares rose vs 40% on the NASDAQ. In terms of transaction volume, the NYSE had 45% rising vs 42% for the NASDAQ. Clearly, participants in the market are not enthused with the current direction.

Since recorded time, civilizations have had economic cycles. While some were blamed on weather or plagues, most of the time the main cause was a prior foolish expansion that could no longer be supported. When this is recognized, it usually requires major structural changes to make progress. Is the forthcoming recession an advance signal of a structural depression? Quite possibly!!

A Problem Needs to be Addressed

The identification of the problem to be addressed is generally too simplistic. Global supply chain disruptions have almost universally been blamed on insufficient physical capacity. While temporary capacity limitations cannot be denied, the focus as usual is misplaced. There is a real shortage of qualified workers and most importantly of first line supervisors. In the US, we already know the ratio of publicly available job opportunities to registered unemployed has almost doubled. This is not purely a US phenomenon, as this week we were alerted to the UK’s ratio of opportunities/unemployed. There are now more opportunities than unemployed, probably creating a pattern I experienced in the late 1980s when we couldn’t hire sufficient qualified computer programmers in the US. We sought help from substantial software development shops in India. We were delighted when our designated vendor showed us the credentials of those assigned to produce the required software on a tight schedule. When it didn’t happen as planned, it became clear the good programmers we were introduced to were no longer there. They had left that employer for another, for perhaps an additional $5/week.

Today we are experiencing a decline in the quality and timeliness of deliveries at supermarkets, department stores, law firms, accounting shops, and hardware/software manufactures, etc. In almost all cases these organizations are desperate to find qualified workers, despite the high wages being offered. They have applicants, but they often don’t have the required work skills. The problem most often is that applicants don’t have the right attitudes toward work.

I suggest this is a generational problem, if not longer. The combination of stressed homes and a unionized bureaucratic school system is not producing disciplined students who value intellectual honesty, nor are they capable of budgeting their own time. To me this is distressing as a fiduciary and a consumer, but it doesn’t have to be that way. I am biased in favor of military training, sports teams, and religious organizations. In the US Marine Corps, officers quickly learn that the wonderful history of The Corps is due in part to non-commissioned officers, starting with Napoleon’s early rank of corporal. (Unfortunately, when cost- accountants run companies, they eliminate levels of supervision. They view it as overhead and don’t recognize that first line supervisors are the main cultural builders of a company.)

I hope we never again have a war that requires us to re-introduce conscription (draft). I say this for lots of reasons, including my grandchildren, great grandchildren, nieces, and nephews. However, as an analyst I am worried that at least half if not many more could not qualify to serve their country, due to their physical condition and mental discipline.

The likely business solution to those unemployed by choice is to encourage more automation. Much of the work done by low level workers has already been automated. Business and non-profits have already figured out that the cost of automation can be amortized over a few years, and so doing they eliminate a substantial number of problems in the workforce. Total compensation paid to lower-level employees vs. the cost of the facilities needed to support them does not offer sufficient pay-back.

This shrinkage of low-level jobs may lead to a permanent group of unemployed, at least in terms of the public record. While developed countries are moving down the replacement trend, it will take far too long to eliminate the unemployed problem. These concerns may be the underlying reason we cannot exclude the possibility of a structural depression.

Investment Conclusion

Be careful and invest wisely for the various likely futures and keep us informed as to what you are doing. We all need help.

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

https://mikelipper.blogspot.com/2022/05/inconclusive-but-trending-lower-weekly.html

https://mikelipper.blogspot.com/2022/05/three-worries-april-near-term-slowdown.html

https://mikelipper.blogspot.com/2022/04/short-long-term-thoughts-weekly-blog-729.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.

ARE WE LISTENING AS HISTORY RHYMES? - Weekly Blog # 704

 

Mike Lipper’s Monday Morning Musings

ARE WE LISTENING AS HISTORY RHYMES?

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

Pseudo Historians?

Whether we appreciate it or not, we are pseudo-historians because we store knowledge of our experiences, thoughts, or what we’ve learned from others directly or through the media. We call this “Memory”. Recall some important incident that happened to you ten years ago. If it is a pleasant memory, we delight in it and it takes up more space in our memory bank than unpleasant memories. Notice, as we get older and have more memories there is little recognition of mild events. Also notice that when discussing a specific memorial event with someone who experienced it with you, the details are somewhat different than yours. As you discuss the slightly different shared views of the past, it would not be unusual to see that you have sugar coated certain aspects. 

Welcome to the world of the historian and notice how two competent people observe the same thing differently. (My personal Queen, my wife, just reminded me that the Queen of England has said “recollections vary”.) Furthermore, most histories are written by the victors or their supporters. Typically, many are called victors for taking some small part in a victory. There are far fewer histories written from the losing side. Few want to be tagged as the reason for defeat. (I wish business schools had extensive courses on commercial failures, as they would be much more instructive than accolades not fully deserved.)

Why am I focusing on the way we learn from historical rhymes in this investment blog? Typical investors believe they have past knowledge they can use to make future decisions. I believe they are not paying sufficient attention to the past, as most investment disappointments are regularly repeated. 

Why Now in October?

One of the curses of history is tied to the seasons and sporadic rotation. Without the same cyclicality of the earth’s rotation, we humans evaluate history to understand why we are in our current condition. This coming week on October 28th & 29th, 92 years ago, became known as Black Monday and Black Tuesday. Over those two days the Dow Jones Industrial Average fell 24%, with volume reaching the unheard number of 16 million shares on Black Tuesday. As early as March 25th that year the Federal Reserve warned of excessive speculation. The stock market had been rising for 9 years and had gained 10 times its starting level. Various pundits proclaimed the stock market had reached a permanently higher plateau. (My grandfathers’ brokerage firm was preparing to retire and was closing client margin accounts.) In addition to investment speculation, the farm community was carrying excess debt due to unexpected crop price declines. (There is a debate as to whether the stock market break was the cause of the Great Depression. It potentially resulted from the loss of confidence that swept the nation, as only16% of the US population was invested in the stock market.)

What About Today?

I have little confidence in my or anyone else’s ability to regularly predict the future of markets consistently. What I attempt to do is gather relevant information that may provide clues as to the future. The following list of inputs is not an attempt to persuade, as in a “Ben Franklin sales pitch” which always has more favorable elements. The data points should be noted, but not weighed, as the unknown future is not as much a mathematical game as a psychological one. The following is my list of items that can lead to an investment decision:

Positives in favor of continued US stock Market Gains

1. For the markets to move higher, the old Dow Jones Theory requires the Dow Jones Transportation Average (DJTA) to confirm the gains of the Dow Jones Industrial Average (DJIA). In the latest week the DJIA gained 108 points and is close to a new record high. The DJTA simultaneously rose 383 points from a lower base. Railroad and trucking companies are transporting more freight out of burdened ports. Airlines are benefiting from increased domestic/international business travel and are additionally profiting from freight business diverted from ships to meet seasonal supply demand.
2. This week, investors using the New York Stock Exchange (NYSE) showed their bullishness by pushing 401 stocks to new highs vs 108 to new lows.
3. In their sample weekly survey, the American Association of Individual Investors (AAII) raised their bullish prediction to 46.9% from 37.9% the week before.
4. The market has been in a constrained trading range for more than six months. The loss of political confidence has led to a loss of investor confidence, resulting in a massive amount of uninvested cash waiting for a signal to invest.

Negatives Against Investing Now

1. Twenty-two out of 88 mutual fund investment objective averages have risen over 60% since March 23rd, 2020, most being the more popular fund categories. Historically, performance exceeding 20% per annum is unsustainable. There are two ways to correct this condition, lengthen the flat period or endure negative performance.
2. For the week, the number of new lows on the NASDAQ was 340, more than three times the number of new lows on the NYSE. Due to the relative absence of passive investors on the NASDAQ, I believe their investors are savvier than those on the NYSE, whose investors are more sensitive to volatile cash flows from passive funds and public investors.
3. The discussion of Black Monday and Tuesday, plus the length of time since the bottom in 2009, reminds me that excess speculation often leads to a market correction. The big difference between now and 1929 is the big debt bulge not covered by flows is in the government sector (federal, state, and local). Current corporate debt in unprofitable companies is also a problem. 
4. While public participation in the stock market is much higher than the 16% in 1929, it is comprised mostly of retirement accounts. In the past they have not been particularly sensitive to market moves, but growth in the lack of confidence could see dramatic changes.

Please share with me which you see first, a 50% rise or fall?  

 

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

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

https://mikelipper.blogspot.com/2021/10/the-confidence-game-weekly-blog-701.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.