Strategically, Time to Think Differently - Weekly Blog # 927

 

 

 

Mike Lipper’s Monday Morning Musings

 

Strategically, Time to Think Differently

 

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

  

 

Warning: Almost No One Will Agree, Nevertheless Consider

My Burden: Hedging

 

After a market week of lots of good earnings and media pundit optimism, it’s time to worry. Individually, before we consider securities investments, we should consider our personal long-term investments. For most of our adult lives our two biggest investments are our homes and jobs. While we believe we know the numbers, we are wrong!

 

We fail to include in the analysis of our residence the true costs that come with the property over time. For instance, we do not include real estate taxes, either paid directly or included in rent payments. If we stay in our homes for ten years, in one place or more, the aggregate cost will probably equal the cost of buying initially. But that is not the actual cost of living in a home. That amount should also include the cost of local organizations we join, as well as the cost of any repairs and maintenance. Thus, the combined cost should be considered, as well as the planned next location, which likely represents a potentially large unhedged risk.

 

As large as the cost of home ownership is, it is hopefully smaller than the next risk. For most of us, our biggest risk throughout perhaps the first twenty years of our adult lives, is employment risk. If we work for one or multiple employers and we are not self-employed during most of our working years, our biggest risk is employment risk. We are living in a fast-changing economic world, where employers disappear as a result of business mistakes, technological change, badly executed mergers, and younger, smarter, better educated, and cheaper competitors.

 

We are Not Helpless

Over time, we can not only help ourselves but also accumulate sufficient capital to provide long-lasting wealth to cover our own lives and hopefully those of our loved ones too. This can be accomplished by regularly spending less than we make through our jobs and investments. Cyclicality is our enemy. As we move up in the commercial world an increasing portion of our wealth comes from accepting portions of compensation that have equity-like rewards and risks. The further you move up the economic ladder, the greater the rewards and risks. Additionally, the higher you go up the ladder, the more cyclical it becomes. Income fluctuates with sales and profits, but also due to changes in politics within the organization. This cyclicality should be hedged to the degree possible.

 

Selection of Investments is Critical

Picking good investments is always difficult. For the most protection, the primary goal should be seeking assets that hedge those investments generating the highest gain. I believe we are on the cusp of a period of major change, not the continuation of “happy talk” optimism. This past week there were dramatic headline changes of direction, but the market as measured by the S&P 500 barely returned to its prior high. Concurrently, the Economic Cyclical Research Institute (ECRI) industrial price indicator dropped to 122.27% from the prior week’s 131.20%. While this was an extremely happy reading of growing inflation, I suspect it was driven by natural gas prices plummeting -21.41% and diesel falling -4.79%. Far too many retail investors follow prices on the NYSE, where 39% of the stocks declined for the week. However, the better performing NASDAQ Composite saw 56% of its prices fall. Also, the American Association of Individual Investors (AAII) weekly sample survey showed the bullish outlook falling to +39.7% from +44.4% the prior week. In the real-world January produced the largest cut in jobs, which have been falling for 8 months.  

 

Conclusion: One Should Hedge

 

 

 

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Mike Lipper's Blog: Is This The Week That Ends Instability? - Weekly Blog # 924

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Two Cycles Are Worth Watching - Weekly Blog # 793

 

Mike Lipper’s Monday Morning Musings

Two Cycles Are Worth Watching

 

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

 

 

 

Concept

I am basically a student. My reading of history, politics, government, finance, and sports, reveals that each trend reverses somewhat before following a different trend.

 

In selecting individual securities, the specific characteristics are often of primary importance. In constructing a managed portfolio, the analysis of sectors are important. In deciding whether or not to invest, cycles may be the most important factor. All of these considerations need to be adjusted for the identified needs of the owner of the asset. As an investment adviser I must consider these different responsibilities.

 

Below is a review of history through different cycles, along with a view of both the current period and various potential phases.

 

First Investment Cycle

In some respect an investment advisor is like a baseball umpire behind home plate calling balls and strikes. A famous umpire once stated that he calls them as he sees them. As an umpire I call them the same way. The difference is that my initial view utilizes mutual fund data. Not necessarily the best investment research media for all accounts in all situations, but a superior one for relatively unbiased analysis. Other measures rely either on a small group of expert analysts, media employees, or choosing to be listed in a specific marketplace.

 

Unlike the alternatives, mutual funds have in or out cash flows every market day and reflect the periodic decisions of their managers. Since there are more than 15,000 funds, this represents a large number of decision makers. Their results are much quicker at picking up the impact of investor decisions. (My old firm’s data is now published by the London Stock Exchange Group, which purchased it from a subsidiary of Thompson Reuters after it acquired it from me.)

 

Each week I review 107 mutual fund peer-groups over 11 time periods. This week I focused on the total investment return in three time periods: the 5 and 10 years periods and the period since the trough on 3/23/2020 through 7/13/2023 shown below:

 

Peer Group     5-Year    10-Year    Since Trough

Large-Caps    +10.20%    +11.26%      +23.62%

Mid-Caps       +7.42%     +8.99%      +25.74%

Small-Caps     +5.62%     +8.00%      +27.25%

Value          +7.26%     +8.01%      +24.63% 

Growth         +8.37%    +10.06%      +20.23%

 

Observations:

1. Large-Caps won the last 5 years, but not the recovery.
2. Small-Caps were the recovery winner.
3. Mid-Caps with value orientation could be a reasonable bet, probably benefiting from M&A.

 

While “the market” is focused on reported inflation, consumers are not. Using the experience of retail consumers during Amazon Prime Days, the average order was $54.05, up only 3% from last year. A significant increase in buy now, pay later shows that consumers are managing their cash carefully.

 

According to a recent survey, 40% of asset owners are considering indexing. Equal weighting is gathering attention, a positive initial change that perhaps leads to active management later. The more investors congregate in the center, the less buying competition for attractive securities. However, for the best-selling opportunities buyers will have to wait until the too easy choice of the center becomes lonely.

 

Analytical Conclusion:

The current large-cap, growth leadership is unlikely to lead competitive investors much longer.

 

Despite the media hype that we are in a new “bull market”, investors for the most part are considering other issues. Top and bottom prices are established in the market, not through highs and lows in a calendar year. Using historic peak prices, the DJIA is 6.63% below peak, the S&P 500 is down 6.46%, and the NASDAQ is off its top price by 13.77%. We have therefore not been in a bull market. One can view what we have experienced as a rally or a correction. The NASDAQ Composite, the best performing index, hit its high on 11/19/2021. On that basis, we have been in a “bear market” with rallies for almost 2 years. This could be the first part of the feared stagflation, which could last for many more years, using history as a guide.

 

The Major Empire Cycle

One oversight of our Western European focused education system is not studying the repeated failures of various empire cultures around the world, not only in government but in business too. These problems could be avoided.

 

World trade is often the litmus-test relative strength evidence of growing and declining empires. We are entering the test period now. The World Bank noted that China contributed one half of annual world growth over the past few years. Due to current disinflation and deflation readings from China, it is expected to contribute only one third of the reduced size of world growth this year. This weekend The Wall Street Journal had a front-page headline stating “China’s Slowing Growth Has Many There ‘Losing Faith’ “.

 

Instead of the US taking a victory lap, we should be concerned. The math of the situation is that China’s import of US goods and services is dependent on their dollar earnings from Chinese exports. This is on top of Washington’s vote buying efforts restricting risk-oriented investment into the US. Odds are, a top-down Washington directed industrial policy is unlikely to produce positive results quickly.

 

One of the lessons I learned from college fencing was to respect my opponent and his abilities, including some that were not obvious. I feel the same way about China. Even though I have visited Beijing (central government), Shanghai (commercial power), and Shenzhen (industrial development) over the years.  I also spent additional time in Hong Kong where we had an office before HK was returned to China. I do not claim to understand how China really works. It however has one of the longest written histories of any large society, so I know it does work.

 

China has had some form of central government for at least 3000 years. Only rarely has it been ruled by an invader. Most of the time it has been ruled by a succession of dynastic families. Failing dynasties have periodically been replaced by palace revolts or revolutions from the south. During this long period it has been the leading country of the world at times, as well as its scientific leader. At one point it had the most powerful navy in the Mediterranean, before recalling it to be burnt due to politicians at the court not wanting any foreign entanglements.

 

There are two reasons for mentioning this. The first is to acknowledge the world power potential China could have had. The second is to demonstrate that China has always had an isolationist stance. Roughly 90% of its inhabitants are classified as Han Chinese today. Many other ethnic groups within their borders are carefully monitored. The largest being the 3 million Uyghurs and other Muslims which arrived before Marco Polo.

 

During the Song Dynasty (960-1279) there was a great deal of scientific advancement. This advancement was probably based on algebra, which the Chinese invented. Arab traders later used algebra and introduced it into the Muslim and European cultures. Other inventions from China were the abacus, gunpowder, binary code (genetic sequencing), paper making, and printing.

 

The basic unit in Chinese culture is the family. Families are often grouped into Tongs, some of which have led to Dynasties. Loyalty stretched from the family unit up to the courts of the leaders. Most of these units had a singular leader, generally the most powerful man and only rarely a woman. Even today, most groups are led by a dominant male.

 

The present leadership views its power as being derived from providing jobs, housing, and food for its citizens. At the moment there are no known potential rivalries for leadership. However, those on top are undoubtedly concerned about the large number of youths between 16 and 25 without jobs. They are not accepting low-level jobs below their educational expectations. There is two-way traffic for young smart people. Most move to western countries, preferably the US, when given the chance. However, there are a small minority working in the US who experience bias against them and return home, where they are welcomed.

 

Housing is another problem. While a lot of apartment building have been initiated, many are incomplete because builders spent the deposit money on marketing and other unfortunate expenses. The government, mostly through the provincial governments, is trying to help, but progress appears to be slow.

 

Two Conclusions:

1. China is having recognized economic difficulties. However, their disappointing 5% goal for this year is many times larger than the somewhat rigged 1%-2% growth in the US, and no growth in Europe.
2. China in the long run has some built in advantages, such as the Central Asian railroad into Europe which is being built to sell their improving quality goods. Their second big advantage that has become clear to the world is the poor-quality US government leadership, stretching from Afghanistan through Taiwan and into Ukraine. While China is having growing pains, the US is retreating.

 

Under these circumstances it is probably prudent to include some Chinese assets for global diversification as an important hedge against our problems here.     

 

 

 

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Mike Lipper's Blog: Retro, Forward, & Cycles - Weekly Blog # 792

Mike Lipper's Blog: Gravitational Waves & Investing - Weekly Blog # 791

Mike Lipper's Blog: Manageable Risk - Weekly Blog # 790

 

 

 

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Begin to Dollar Cost Average the Equity Process - Weekly Blog # 753

 

 

 

Mike Lipper’s Monday Morning Musings

 

Begin to Dollar Cost Average the Equity Process

 

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

    

 

 

Process vs. Point

Many prudent investors have been reducing their equity exposures for some time. They have relied on equity investing as their main tool to meet long-term goals. They have been withdrawing a portion of their investment in stocks for some time. Many have reduced their equity holdings by around 30%. This is easier to do for individuals than institutions, who cannot hold a lot of cash. Institutions move into lower volatility investments, hopefully temporarily.

 

The one thing we know about investing in stocks is that they go up and down occasionally by large amounts. After Fridays close, all three of the main US stock indices and many international stock indices had fallen to lowest prices in at least in a year.

 

There is a feeling that this is an opportunity to reinvest in various stock markets, yet there is also a well-reasoned fear of even deeper bottoms ahead.

 

Long-term conservative investors have in the past recognized that it is much easier to identify a low valuation price region than to pick a particular price re-entry point. I believe I won't be able to identify an absolute bottom point until after it has been reached and probably tested by a subsequent decline that holds above a previous low point.

 

The very best I can do is believe many markets have entered a low-price range. This range can last for an indefinite length of time based on known and unknown factors.

 

The process I will use for account responsibilities and my own accounts, is to divide the maximum equity reinvestment into small purchase buckets, typically 5% to 10% of the total to be invested. That is the easiest part.

 

The two much tougher tasks are the planned frequencies and the individual selection of advisors, funds, and individual stocks.

 

Frequency of Investing

I don't know what the future holds. Everything in life is a gamble from the time we get up in the morning, so we should have a plan. The plan is to lay out the first steps, which will likely be modified in the future.

 

For sake of argument, assume there are three planned frequencies. I will use time periods, but you could also use price levels. For illustration purposes the three frequencies of time are monthly, quarterly, and annually. This is where judgement comes into the process, when to execute into each investment bucket.

 

To my mind, investing monthly assumes the main factors determining long-term results become clear within the next several months. This prediction is largely a price prediction. I don't have confidence in my trading skills to recognize this kind of condition.

 

I believe the bear market we have recently entered will be followed by a structural economic recession. Causes of recessions are usually based on fundamental changes in people's economic and political attitudes, not statistical measures. As these have not yet been identified, I prefer a quarterly reinvestment frequency, which could last two to five years.

 

Based on history, there have been at least two periods of stagflation lasting about ten years. In this scenario, I am prepared to shift my frequency to annual investing. (Sound corporations often use five years or longer for their critical investments)

 

Because I can't accurately predict future prices, I allow them to guide me in executing buy programs. When the price of a targeted investment is 10% below my last entry point, I delay future investment until the next scheduled time. If the price of the target investment drops 25%, I need to take a fresh and probably different view.

 

Current Picture

According to some statisticians, the average bear market decline from a prior peak is 37%. (Numbers and words share the same characteristic of being frequently misleading.)

 

The following table compares Friday's closing price, its decline from the peak, and the remainder of a 37% retrenchment.

 

Index              9/30 close   %Fall from Peak   %Further

DJIA                28,725.51      -21.94%         -16.73%

S&P500               3,585.62      -25.25%         -15.72%

NASDAQ Composite    10,575.62      -33.20%          -4.34%

 

The peak for the DJIA and S&P 500 was 1/04/22. The NASDAQ Composite peak was 11/19/21.

 

For those who can tolerate volatility caused by less liquidity, NASDAQ may give a bigger but more exciting ride.

 

Possible Strategies

Believing we are entering a new market and possibly a new economic phase, the reinvestment program should focus on different thought patterns. If the existing investments are sound, the new investments should hedge a major change, with an anchor windward.

 

Consider real estate, the worst performing sector for at least a year, for a different thought pattern. They have suffered from the work at home syndrome, leaving lots of empty space in offices, city stores, and restaurants. Many real estate entrepreneurs are smart. The bet is that they will convert their space to residential or other productive use. Furthermore, current rising interest rates for mortgages will eventually top out, increasing the cash generation of sound property. This is a bottom fishing candidate, but there are others.

 

Holdings missing from many portfolios are energy securities. The absence of some institutional money may be creating bargains. Too much attention is being paid to the price of oil and other commodities. The key to figuring out energy earnings being neglected by some in the market is the volume of product sold. I am guessing an average price for oil of $50-$70 a barrel. Earnings of many oil companies will be higher than they are today as demand destruction is taking place. This is an example of extrapolation, where the market sets stock prices based on today's conditions and fails to discount future earnings that might be quite different rather than a mere extrapolation. Similar mis­pricing could lead to a good long-term hedge vehicle.

 

Question of the week: How much of your portfolio is in currently invested in unpopular stocks?

 

 

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

https://mikelipper.blogspot.com/2022/09/if-not-bottom-then-what-weekly-blog-752.html

https://mikelipper.blogspot.com/2022/08/4-5-changes-disruptions-faulty-weekly.html

 

https://mikelipper.blogspot.com/2022/08/mikelippers-monday-morning-musings.html

 

 

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Planning for Rising Stock Prices - Weekly Blog # 751

 

 

 

Mike Lipper’s Monday Morning Musings

 

Planning for Rising Stock Prices

 

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

    

 

 

Contrarian Concerns

If only we could be unbiased when observing stock markets and investors. We might get clued into probable future steps we should take. We should examine all that is exposed to us. The strengths and weaknesses of realities, rumors, and reactions. In many cases crowds believe in "facts", which when fulfilled provide comfort. In much the same way contrarians often see the opposite in the same set of facts.

 

For an extended period, I have been seeing growing evidence of problems for various stock markets and related countries. I was comfortable with these feelings because relatively few perceptive analysts and other investors shared them.

 

Now, the worst of all possible trends is befalling a contrarian. The attitude of many sophisticated stock market investors is turning, echoing the attitude of the US Treasury bond market. Worse still, leaders in the commercial world are dealing with a present and likely future collapse of demand for their products and services.

 

International Paper, Packaging Corp, and West Rock (*) announced a massive inventory glut of containerboard, which is critical in packaging most shipped goods. Consequently, I was not surprised by FedEx's quarterly earnings announcement, which fell 32 % below analysts’ estimates. The release indicated the company was reducing usage of its plane fleet, closing offices, and cutting expenses.

 

When operating companies have these problems it almost always means smaller M&A activity and underwriting. Thus, it is not a surprise that canny Goldman Sachs (*) reintroduced a policy laying-off the bottom performers of its talented staff. This week's IPO actions by American International Group (*) have them selling some Corebridge Financial at the low end of the expected price range, which fell below the issue price in the after-market.

 

(*) Held in personal accounts

 

My reaction to this negative news was to accelerate my previously mentioned plans to look for new buying opportunities in new names.

 

An Organized Search Process

I have had discussions with sophisticated investors who have exited the equity market with 30% or more of their prior commitment. This has created a potential 30% buying reserve.

 

As subscribers to this blog know, I question whether we have seen the bottom of the US stock market decline. The S&P 500 hit its technical price low since June at roughly 3900 this week. One respected market analyst’s response was that the index had bent but did not break.

 

I don't know if the September or June bottom will hold or break at the 3600 or 3000 level. Although it is possible we have seen a bottom from which an upward expansion could take place.

 

My tactic in this case is to dollar cost average into favored investments. I divide my purchasing reserve by 6, putting 5% into the purchase bucket. One reason I believe we are likely to go into a serious recession or worse is that I see too many imbalances, with declining efficiency and productivity in the economy. Although I could be wrong. The way I deal with it is to invest differently than what produced my existing portfolio. So, if the market is flat at the end of the reinvestment period, I would have 70% in the original holdings and 30% in new thinking.

 

The first hurdle is determining the frequency of investing is the reinvestment money. One could choose monthly, quarterly, or yearly. That decision should pivot on the kind of decline expected. It could simply be a price decline where monthly investing generates a good result. If you think the market went down primarily because of imbalances in the economy, then investing quarterly makes sense, as these problems won't be solved until next year at the earliest. Although the market should anticipate this event somewhat. An annual investment makes sense if you believe we might be entering a period of stagflation.

 

At first blush the annual investment might seem excessive. However, we experienced two periods of stagflation in the 1930s and 1970s, which suggests it could happen. Since everything these days seems to move at warp speed, I searched the mutual fund data bank produced by my old firm this week. I examined the 170 mutual fund investment objective performance groups averages through this Thursday. While most had a down calendar year, prior years were positive.

 

For the last three years 40% of the performance averages lost money. Thirteen percent lost money over five years and 5% lost money over ten years. These numbers suggest we could be in for a long dull period.

 

The reinvestment plan I am suggesting is not a hands-off procedure. Anytime the targeted investment is off 10% from the prior determined period, I would double the commitment. This may produce a bargain for the investor. It also reduces the length of the investment period. On the other hand, if the target price drops 25% I would pass on the opportunity and wait for the next period, assuming the basic research remains favorable.

 

What to Buy to Complement the Portfolio

Remember, reinvestment is meant to offset investment opportunity in existing holdings. I suspect most holdings are dollar dependent, so at some dollar level the US will price itself out to foreign buyers. Internal political issues in various countries will also improve.

 

For those that have never owned a stock traded beyond our border, I would start with some Canadian holdings.

 

India has the largest middle class in the world. Other Asian countries, including China, are a good hedge against the dollar.

 

Another approach not in many portfolios are companies developing new products and services to fill unmet needs for new products/services not currently available.

 

If the individual selection of securities takes up too much time and you lack confidence in your selection, you can use mutual funds. As these funds are intended to address other needs in an investment portfolio, the following list of attributes may be useful in the selection process:

• The portfolio manager has ten years of experience running the fund, with a record that can be researched to understand down periods.
• A focused portfolio of under 70 names in two handfuls of sectors.
• A portfolio letter released at least semi-annually that is easy to read. It should be about the portfolio and not the economy.
• A proper discussion of what didn't work and why, without blaming others for mistakes.

If all of this is too intense, I suggest index funds covering large and small companies, both here and overseas. Most index funds track a published index in terms of weighting how much to invest in each security. This is where a critical decision must be made. Most index funds own the same percentage the stock has in the index. Consequently, a handful of the biggest positions in the fund will drive performance in rising markets. While great in a rising market, it could be a negative in a declining market where investors sell their most liquid holdings. Equal weighted index funds in some cases will slightly underperform on the way up but decline less than capitalization weighted index funds on the way down.

 

Question of the week:

Are you open to investing differently for the next good market?

 

 

 

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

https://mikelipper.blogspot.com/2022/09/mike-lippers-monday-morning-musings.html

 

https://mikelipper.blogspot.com/2022/09/i-can-be-wrong-weekly-blog-749.html

 

https://mikelipper.blogspot.com/2022/08/4-5-changes-disruptions-faulty-weekly.html

 

 

 

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Time to Think Long-Term - Weekly Blog # 692

 

Mike Lipper’s Monday Morning Musings

Time to Think Long-Term

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

Dull Can Be Difficult

As perpetual investors, we are like military or golf warriors. When Marines are deployed into temporary defensive positions where they are trained to constantly improve their defense against always expected attacks. Professional golfers or club level champions often spend considerable time on the driving range and putting greens. Thus, I view the current stock market environment as a good time to shift focus to long-term investing, the primary focus of this blog.

The Biggest Picture

Perhaps the biggest picture of all investable assets is our earth. Following the geographical slant, I suggest we start with the US based market, where we come to our first confusion of terms. In the US you can buy pure foreign companies through American Depository Receipts (ADRs) in dollars. Multinationals, which often grow faster and have better margins than pure domestic companies are also available. Pure domestic companies rarely exist in an economic sense, especially with the American consumer addicted to imports of food, clothing, cars, television sets, cell phones, oil, and many other products and services. Thus, we have become globalists whether we like it or not, creating a dichotomy for our politicians who are mostly lawyers. The politicians see the US as mostly bound by laws and regulations they created. They fail to appreciate that one appeal of these goods and services to consumers and investors is that they are not bound by the whims of politicians in DC or state capitals.

What is the Outlook for the “Governed” USA?

Both in terms of actuality and perceptions, there are negatives in assessing the long-term outlook, briefly listed as follows:

1. Militarily, the US is in geographical retreat from Asia, Europe and the Mid-East. Coupled with a declining budget for fighting expenditures, senior officers are being selected based on their political skills.
2. Homes and schools are producing unemployable students, lacking intellectual integrity, discipline, leadership, and physical skills.
3. We elect governments that prefer top-down, centralized, restrictive control, lacking in bottom-up experience.
4. The US is currently burdened by a lack of rigorous international leadership skills.

Offsetting the negatives are some positives for the US:

1. Around the world, people want to live and earn in the US.
2. Compared to other developed countries we have a strong geographic location.
3. We generally have abundant natural resources, which are becoming increasingly expensive to produce and get to market.
4. We have the richest consumer and commercial markets in the world.
5. We have the largest and deepest financial markets in the world, likely to become more expensive and restrictive in the future.

What Other Choices are There?

There are lots of attractive long-term investing and trading opportunities in other countries. However, in terms of geographical hedging against possible problems in the US, there appears to be only one large choice. Most other developed countries are export driven, with the US being their largest single market. If there are problems in the US, these countries will not be useful hedges in a domestic portfolio. 

One clue to this correlation with the US is the leading performing industries in their local markets. According to Standard & Poor’s, the two best performing industry groups are technology and materials in the stock markets of almost all the developed countries and many developing countries, including the Islamic countries. Hard to imagine a long-term situation where these local industries do well without a parallel move in the US.

This correlation is not accidental, the tie between the UK and US is an example. Wealthy people in the UK took part of their economic winnings from domestic sources and invested them in the US. Some of the early growth of The Financial Times and Reuters was based on their publication of US stock prices in the 19th century. In the early 20th century, my grandfather’s brokerage firm had a London office service their UK account’s needs for US transactions. Later in the century, both my brother’s brokerage firm and my fund analysis firm also had London offices. The appeal of servicing the needs of UK clients continues to this day.

One of the leading positions in our private financial services fund is Raymond James Financial (RJF). It announced it is acquiring the wealth management and brokerage firm Charles Stanley, a venerable firm founded in 1792. RJF plans to keep Charles Stanley wealth management separate from its own local wealth management activity. While the two offices will largely be using different securities and funds, I suspect they will become similar over time. In part because they will be using RJF’s superior technology adapted for the UK market.

The Only Choice as a Hedge?

The traditional choice as a hedge is one that goes up when the primary investment goes down. A more modern approach used by early hedge funds and other traders was a bet on different rates of growth, often labeled “pair trades”. The problem with that strategy was pair components moving more due to external forces than to the differences between the pairs.

Thus, as a global investor, like it or not the best hedge is China. This is not a happy choice, think of all the objections to investing in China. When you boil down these objections, they largely come down to one thing. They are not the US!!!

Absolutely true, but China is the second largest economy in the world and is growing much faster than the US or the developed world. This should not make us apologists for their perceived transgressions. The recent 50% or more fall in many shares is a demonstration of the evils of a “command economy”.  There is an interesting parallel between what their central government and Washington attacked; the power and scope of large monopolies, lose credit conditions outside the formal banking system, and privileged for profit education. The main difference between the number one and number two economies was that China moved faster and was more devastating.

I am not suggesting you buy individual Chinese stocks, bonds, or loans. What I am suggesting is you follow the late and great old data customer of our firm, Bill Berger. He called some of his investments “Chicken Bergers”. These were positions that participated in a trend but had more downside protection. In my case I am suggesting the use of regional mutual funds with analysts in the Asian region who have significant minority holdings in global portfolios. This is a good time to consider such a move as I suspect we will soon be entering a more intense higher volume period where it may be more difficult to think long-term.

Current Indicators of Change

I believe the structure of the market is in the process of changing, but it’s not yet clear as to direction. This could be a cause for concern and the following are “straws in the wind” as to future changes:

1.  Change in fixed income issuance over the past 12 months:

Investment Grade bonds    +68%

Leveraged Loans          +208%

Structured Finance       +203%

 2.  This week’s 6-month prediction in the AAII weekly sample survey shows a change of 6% “Bullish” and “Bearish” move, with Bullish positive and Bearish negative. Both were at 30% last week.

3.  Number of days to cover shorts: NYSE 2.9 vs NASDAQ 2.3

4.  The JOC-ECRI Industrial Price Index had a weekly gain of 1%, substantially below its 12-month rate. 

Working Conclusion:

Changes are coming soon and the time to develop global hedges may be short.

Comments are solicited, as I am sure not every reader is in total agreement with this blog.

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

https://mikelipper.blogspot.com/2021/07/mike-lippers-monday-morning-musings_25.html

https://mikelipper.blogspot.com/2021/07/correcting-impression-and-gaining-some.html

https://mikelipper.blogspot.com/2021/07/sentiment-appears-to-be-changing-weekly.html

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