Pre, Premature Wish - Weekly Blog # 780

 

Mike Lipper’s Monday Morning Musings

Pre, Premature Wish

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

 

 

 

Motivation

After stripping away all the worries, details, and paperwork, the critical mission for analysts and portfolio managers is optimizing the capital of our clients, including their families. Despite our perceived brilliance, it is much easier to accomplish this mission during a “bull market” rather than a “bear market”. The biggest mistake and most difficult to recover from is missing the beginnings of a significant bull market, which is very easy to do.

 

Most of the time markets travel through various transitional phases:

• Early recognition by a few far sighted, but often difficult people.
• Growing acceptance.
• Almost universal acceptance, except for the worrywarts.
• Finally, the proclamation of a permanent condition. 

As the inevitable bear market becomes visible the process is reversed.

As it is difficult and dangerous to jump aboard an accelerating train, I prefer to board when it is marshaled in the yard. The difficulty of getting aboard requires an amount of brains, courage, and luck. That is precisely what I am attempting to do by focusing on conditions before travel begins.

 

Pre-travel Conditions

First, study past bull market journeys. Some start, but relatively few amount too much. Why? It may be that the damage done by the prior bear market was insufficient to get the necessary support. Additionally, the market may lack reasonably competent management capable of selecting the right track and able to keep the momentum moving in the right direction at increasing speed. Enough momentum to break the friction caused by others, including one’s own partners.

To start a bull-market you must first have been sufficient pain from the preceding bear market, with the ability to initially fund dominance over key doubters.

Today, there do not appear to be sufficient losses needed to be made up. However, for most of this calendar year there have been more shares sold at lower prices than bought at higher prices, both on the “big board and the NASDAQ. Most trading weeks there are more shares sold at lower prices than at rising prices, by a ratio of 4 to one. Buyers are labeled as accumulators and sellers as distributors by market analysts. Contributing to distributions are some investors moving out of dollar-based securities. The US dollar is in its fourth decline in fifty years. With the proceeds from their sales many investors are buying bonds, either for the first time or in quantities way beyond their habit. Others are investing in European and Asian stocks.

Currently, the risk of losing a little in bonds and stocks is probably close to being equal.  As new fixed income buyers venture into higher risk paper, the potential exits for higher risk paper to generate greater loses in fixed income than for stocks.

The total global economy is slowing. Not only in sales, but also in profits as margins narrow due to government policies restricting profits. There is a tendency to lower perceived risks.

After an investor loses more than expected, there is often an emotional need to quickly recover those losses. This is the second wave of money that will be sucked into buying stocks in a new bull market, and so the cycle begins again.

As much as I want to participate in a new bull market, it is apparently premature. Consequently, we must husband our resources and work to find relative islands of improving profitability.    

 

Thoughts?

 

 

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

Mike Lipper's Blog: 3 PROBLEM TOPICS: Current Market, Portfolios, and Ukraine- Weekly Blog # 779

Mike Lipper's Blog: What To Believe? - Weekly Blog # 778

Mike Lipper's Blog: Equity Markets Speak Differently - Weekly Blog # 777

 

 

 

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Michael Lipper, CFA

 

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Where are We and So? - Weekly Blog # 602

Mike Lipper’s Monday Morning Musings

Where are We and So?

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

All too often those commenting on the stock market and the economy are either out of date or clueless about important changes. One of the more instructive research exercises is to review the prognostications and analysis written between September and December of 1929. While most histories focus on October 1929, few note that by December the Dow Jones Industrial Average had already returned to its October peak. This lack of understanding and its implication is similar to the six-month period after the murder of the Archduke, where troops did not start to position for open conflict until six months later. This period has been called the phony war.

As of this weekend all three of the US stock market indices are at record levels after a twelve-year climb. Currently, I don't know what this means, hopefully a subscriber or their advisor can share their wisdom on what this means for the future. My lack of clarity is based on conflicting views of the data. The averages and many diversified equity mutual funds are showing gains of over 20% year to date. While not the highest on record, these are extremely good results. The gains are more than double the long-term gains of the S&P 500, with dividends reinvested, since 1926. Typically, high valuations are caused by the sudden entry of new money from unsophisticated investors into the equity market. Due to the lack of enthusiastic volume on the upside this does not currently appear to be the case.  Additionally, there have been significant flows into fixed income funds at low interest rates. These investments could lead to total return losses when rates rise.

The other issue driving performance is the belief that better markets lie ahead. This is clearly possible, but it won't be easy. For it to happen two partially interrelated events must occur. There needs to be sufficient tariff and trade relaxations and the Chinese economy needs to begin to grow at close to prior rates. Without China's growth, global GDP growth is likely to be quite modest.

The problem facing most advanced economies is that their political leaders are focused on elections and the biggest group of voters work directly or indirectly for the goods-producing industries. (If global trade issues modify, value investors who own goods-producers may benefit). However, in the US and other advanced economies, most employees and entrepreneurs are in the enlarged and growing service sector. For political reasons, many governments are not overly friendly to this portion of the private sector

Technology can continue to spur national and international growth if government policies don't retard growth too much. However, there are a series of hurdles that must first be jumped. Technology must replace labor's repetitive work, requiring more skilled workers to run the machines and processes. This trend is already at work in retail, hospitality, and healthcare, where there are many job openings. The demand for even more jobs is likely, as customers want/demand more services. The problem is that many of those that are legally unemployed are not qualified for the openings, due to a combination of attitude and poor training at home and/or in school.

An Unhappy Solution is Possible
There is a chance that many individual and institutional investors, including Pension Plans, lose so much of their investment in private debt that they largely abandon their reliance on fixed income. They then might foolishly devote 80%+ to equities and we could then all sell into that.

On Monday we celebrate all the Veterans and their families who ever wore a uniform to protect their family, country, and way of live. Originally, the day was intended to recognize the Armistice that ended World War I. I hope that it is a reminder that it much easier to spend blood and resources than build a lasting peace.

Until we find the way to accomplish that goal, I say to my fellow US Marines, Happy Birthday. We will protect you and others until we collectively find peace.




Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/11/top-down-dictums-measured-digitally-are.html

https://mikelipper.blogspot.com/2019/10/two-questions-length-of-recession-near.html

https://mikelipper.blogspot.com/2019/10/things-are-seldom-what-they-seem-weekly.html



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A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.