Trade, Invest, and/or Sell - Weekly Blog # 836

 

         

Mike Lipper’s Monday Morning Musings

 

Trade, Invest, and/or Sell

 

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

      

       

 

Every moment of our investment lives we accept the choice and risk of investing in equities, or alternatively accept the risk of not investing in equities. There are two valuable insights that may be helpful in reaching your investment posture.

 

The first insight rests on investment history. John Auters, a well-respected columnist now with Bloomberg wrote this week “History is clear it’s very, very dangerous to get out of stocks.” He was relying on data from Barclays using average annual returns for each component: cash, bonds, and stocks, covering the 20, 10, 5, & 1-year periods. The study showed stocks outperforming cash and bonds for each slice of investment history. This was not surprising, stock investors expected it.  What was surprising was the absence of a single 20-year period of losing money. This should provide some comfort to the two university investment committees on which I serve, as well as other long-term non-profits and those who supervise inter-generational trusts. (Due to a more strenuous history in the UK, a 23-year period will produce the same results as the US.)

 

When thinking of strategy, it would be prudent to remember the wise words of Jaime Dimon, the 20-year CEO of JP Morgan Chase, the most intensely managed global bank. He said, “We know we are going to be wrong”. (The key is recognizing the mistake and correct it.)

 

What about Bonds

We are on the verge of generating US Treasury yields of 5%+, with high quality corporates already at that level. Because of a hike in the Fed rate or some other driver, we may possibly be dealing with 2 - 30-year treasury yields reaching 5% or higher. If that were to happen it could harken back to the years when the retail market and some institutions plowed money into the “magic fives”, which attracted cash and/or redemption cash from funds, bank accounts, or the sale of equities.

 

With US Treasuries generally accepted as the safest investment vehicle, there was a rush to own them. Since 1928 there have been 19 years where yields on US Treasuries were negative. Not bad, 97 years with no defaults. (Mutual funds owning a portfolio of bonds continuously buy treasuries, so they don’t have a fixed maturity or a date certain when the holder will receive full payment of principal and interest, which the owner of the actual individual bonds does). Thus, there is low risk to the owner of bonds, which should be considered for a below equity return, with the odds suggesting a positive return.

 

Potential Worry List

There is an overabundance of favorable news from largely left media-oriented sources, with little or any balance. There is a need to identify what could go wrong. Some suggest the radio operator of the Titanic was too busy sending out congratulatory messages to receive iceberg warnings on its maiden voyage. (Is the list of worries analogous to the iceberg messages not received by the ship’s senior officers?) History suggests we could be surprised by governmental activities until the end of 2024.

• The feedback communications loop is getting weaker. Print advertisements are dropping at both the New York Times and the Wall Street Journal. One day last week the eastern edition of the Journal was reduced to one section, rather than the usual multiple sections. Major ad agencies are reporting weak advertising revenues. Much of the decline is probably a function of less advertising by the big box department stores, except by those closing branches.
• The shopping habits of lower income customers are changing, with lower priced merchandise replacing higher priced brands.
• Industrial product prices rose +1.87% last week after a period of little movement. On a year-to-date basis industrial prices have risen 3.56%. (I wonder if the long-term inflation rate will settle in the 3-4% range rather than the 2% level stated by the New Zealand central bank.)
• Some manufacturers have noted some of their customers building a stash of their supplier’s products, delaying sales by the producer. (I don’t know if this is due to past supply-chain issues and/or the customer hedging against future inflated prices. The second occurs more frequently in countries where short-term interest rates are high or not available.
• Revenue dollars are reported, what is not reported is the number of transactions. In some cases when unit growth is meaningfully below revenue, prices have likely risen, which is not likely to be a frequent event. (As an analyst trying to predict the future growth rate, I would reduce the future revenue growth rate. It is much more difficult to project the impact of future profit margin improvements. It may be wise to use a 10-year average, excluding any double-digit year.)
• The developed world needs more productive workers. April job creation in the US was the second lowest going back to at least January 2022. The US birth rate has been below the replacement rate for some time.
• Stock markets participants are sending mixed messages. Of the 32 weekly stock price indices published by S&P Dow Jones, 28 rose and 4 fell, with 3 being overseas and one domestic.
• The AAII sample survey shows 40.8% bullish and 32.1% bearish for the next 6 months. The bulls are much more volatile, their reading three weeks ago was 23.8%. Over the same period the bears declined from 35.9%.
• Transactions in the markets were also split. 35% of the volume on the NYSE fell, while 45% on the NASDAQ declined.
• In terms of the leading fund performance by sector. Though Thursday the utility sector led with +4.53%. The worst performance was generated by Indian Region funds, with a return of -2.77%.

 

Unlike the captain and crew, I am aware of risks and have a buying reserve and many holdings.

 

 

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

Mike Lipper's Blog: Secular Investment Religions - Weekly Blog # 835

Mike Lipper's Blog: Avoiding Many Mistakes - Weekly Blog # 834

Mike Lipper's Blog: News & Reactions - Weekly Blog # 833

 

 

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Michael Lipper, CFA

 

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Next Race Winner - Weekly Blog # 671

 

Mike Lipper’s Monday Morning Musings

Next Race Winner

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

My best education in picking my next winning investment was not taking the graduate course in Security Analysis as an undergraduate under Professor David Dodd, co-author with Benjamin Graham of the seminal textbook. While the course was very valuable in helping me understand markets, it was not particularly useful in helping me pick future winners, particularly if the future was different than the past.

My single best education in picking winning investments were from the grandstands and paddock at the New York Racetracks. Losing some of your hard earnings on foolish bets did wonders for concentrating the mind. The purpose of this blog is not to discuss handicapping horseraces, but to share an approach for avoiding losses and making betting profits overall.

For purposes of this blog, there are three analytical elements from the track I find useful in picking investments. These elements also help in limiting losses and produce winners over time. (Hopefully, some of my grandchildren and great-grandchildren will learn these approaches as they invest time, money, and emotion in their lives.)

While both security analysis and racetrack handicapping delve into history going back three generations or more, handicapping is more focused on future races or tomorrow’s newspapers than the extrapolation of current trends. One handicapper advantage is the identified conditions of the race are stipulated. How tomorrow’s headlines will impact tomorrow’s investments is unknown. The first analytical task at the track is to compare the conditions, including: distance, weather, track conditions, weight carried on the horse, the jockey, and equipment on the horse. These items, among other things, should be evaluated for all the horse’s recent races and for the upcoming races. (I only wish I had the same level of detail in making marketable invest decisions.) 

In studying the past races of horses, it is worth noting how the horse reacted under past conditions and what the anticipated changes are in upcoming race. Some horses, if they get to the front early on a muddy track, can hold on and win if they are not too tired. Others, that have a lineage or history of regularly coming from behind, particularly on a muddy track, can beat tiring horses. (Some CEOs have no experience being raided or losing a crucial patent case, while others have campaigned successfully in these contests.)

Speaking of the difference in CEOs. Some jockeys use their whip frequently and punish horses not running to their capacity, whereas others ride with a light touch and coax the best out their horses. While one might like one type of jockey over another, the horse owner and future breeder, or the trainer, is probably a better judge. (The Board of Apple fired Steve Jobs who was not doing a good job, but then rehired him after he got more experience at managing a company. They later replaced Jobs, who was ill, with a much different Tim Cook. I have made a lot of money investing in companies that had CEOs I would not want being the trustee of my children or on a desert island, although they did a great job running the company.)

Currently, one of the most useful techniques is to look for horses not moving the fastest in the previous part of the race. Although not winning the previous part of the race, they were passing tiring horses or were accelerating. They did this because it’s the way they run in the early part of a race, or because they didn’t have sufficient racing room. In science & tech, biotech, and entertainment companies, the future is dictated by what is in development, not past financial records.

Applying Track Lessons to Current Investment Policy

For the next generation, the investment world is likely to be dominated by China and the US. In future generations, India, Indonesia, and Nigeria could become fully competitive. Today, a dollar-based score card would have the US far in the lead, probably making it the single biggest component in a long-term investment account. However, China is the fastest moving economy. We may not like the way their jockey rides his horse (Nation), but he has been very effective. He has also recognized the provincial debt problem, which has political implications and needs to be watched. 

There is no reason to doubt China will exceed the US in many ways in the foreseeable future. The actual timing of their taking the lead is a function of the additional weight we are putting in the US saddlebags to slow us down. Thus, any investment should be analyzed with an eye toward what China is doing both at home and globally. Hedging large US investments may require some investment in Chinese enterprises.

A Slowing/Maturing US and Redistribution

On a secular basis, US operating margins have been slipping for some time. We have not noticed it in reported earnings per share due to a combination of issues, camouflaged by increased debt, lower taxes, more foreign earnings, and buy-backs. We have become a mature economy with a small working age population. Furthermore, our school systems are producing people with insufficient real-world education and poor work attitudes.

 

In many ways the current administration is repeating the errors of the 1930s, where the government took a somewhat normal recession caused by excessive leverage and turned it into a depression by attempting to use authoritative top-down social mandates. They terrorized private capital, leading to a slump in capital investment and the formation of new companies. 

As is often the case, one should not pay heed to what professional politicians say, but to the impact of what they do. The “COVID $1.9 Trillion Bill” rammed through the Senate should be relabeled “The 9% COVID Solution to Political Problems Bill”, “The First Redistribution Act”, or “The How to Kill Your Children’s Opportunity Bill”.  

The real intent of the Administration is to increase the deficit in any way it can, requiring taxes to be raised through one large omnibus bill or many separate acts. Their main purpose is to capture private-sector money and use it to fulfill socialist goals. What they forget is that close to half of all employees work for small companies, which large companies depend on to train their future workers. These small companies also produce products and services at lower cost, in part due to their lower compensation and benefits.

The initial capital supporting a small business is the after-tax savings of the entrepreneur. Support also comes from the after-tax savings of family and friends. The more successful small businesses can occasionally tap into private equity and debt funds, which are also funded with after-tax dollars. The pool of after-tax savings comes from the net profits after inflation, and the declining value of the US dollar will curtail the purchasing power of domestic earnings.

Looking to the future of our grandchildren and great grandchildren. They should be prepared to live outside of the US, possibly in Asia, as the reduction of private capital will reduce job opportunities in the US. Sound retirement planning suggests that US investments should be hedged by appropriate investments beyond the control of the US government.

There is Some Hope

Both the current occupant of The White House and his predecessor are doing a brilliant job adding to the base of their rivals. As both leaders pull more away from the center, some will want protection against the extremes. The 2022 congressional elections are an opportunity to accomplish a strong center by electing centrist Senate and House members of both parties. This could prevent The White House from accomplishing its redeployment of capital and other socialist goals. 

It could happen. The current topping of the US stock market and collapsing US Treasury prices, along with the declining value of the US dollar, should be enough of a warning. If not, we could see a copy of the long depression, leading eventually to an economically provoked war.

Questions of the Week:

1. Do you think this kind of problem set is possible?
2. Do you have any plans to include this possibility in your investment planning?

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

https://mikelipper.blogspot.com/2021/02/did-something-happen-last-week-weekly.html

https://mikelipper.blogspot.com/2021/02/debt-inflation-and-markets-weekly-blog.html

https://mikelipper.blogspot.com/2021/02/mike-lippers-monday-morning-musings.html

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Currently, Selling More Important Than Buying - Weekly Blog # 637

Mike Lipper’s Monday Morning Musings

Currently, Selling More Important Than Buying

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

July is often a low volume, relatively quiet, stock market period.  August, with its different conventions, COVID-19 progress and short-term economic signals, will likely be more lively. This is therefore the ideal time to look at portfolios with two to one hundred plus securities. Include in your analysis both all the cash that could be invested and probable cash demands well into 2021. This review is unlike the usual process of buying some new and exciting investment, where you quickly find the money for your new “almost certain winner”. However, most of the time new purchases will not drive next year’s performance, it will be more impacted by the remaining portfolio.

Remember March
Many investors feared that the one-month dramatic fall in stock indices was the opening salvo of a long, protracted “bear market”. As usual with mass fears, it did not happen for political reasons. Yet, although there was still some of the normal cleansing effect of an economic recession, it was perhaps not enough.

Record 2nd Quarter Continuing
With governments and their junior partners, the central banks, induced a strong rally occurred led by speculative forces, including the not yet dead zombies that should have been liquidated. The NASDAQ Composite gained +30.6% in the quarter and continued through Friday with another record high, gaining +4.01% just last week. Globally, the big winners were two handfuls of large-cap technology-oriented stocks. Even with the increasing levels of tension with China, their stocks are the biggest winners as an investment region thus far in 2020. Last week, 16 out of the 25 best performing SEC registered mutual funds for the week were primarily invested in the China Region. (Even within China, the controlled press warned local investors to be careful with record prices and a wave of new IPOs.) In the US markets, 75% of the weekly prices for ETFs, stock market indices, currencies and commodities were higher. Translating all this bullishness into mutual fund performance for the funds we are particularly interested in, some had gains better than 50% from the March lows. One might suggest that some investors are experiencing a sugar or other stimulant high.

Outlooks
There are as usual a myriad of outlooks depending on both direction and varying time periods. While investors should sub-divide their portfolios into different time periods based on the expected needs for their capital, they do not. Unfortunately, most investors, particularly those competing for new money, are fixated on 2020 results. This is unfortunate because I hope the future does not contain many years similar to 2020.

Six Month Positives
The AAII, usually a reliable contrarian indicator, has now flashed four straight weeks where their sample survey of member market expectations for the next six months was over 40% bearish. This number is unusually strong both in magnitude and duration. While they could be correct this time, it would be surprising.

Longer-term Concerns
Citigroup has a model identifying periods of panic and euphoria designed to predict the stock market one year into the future. It is based on tracking extreme current market behavior that will lead to a reversal the following year. The current reading from this model points to lower stock prices a year from now resulting from the short-term euphoria we have been experiencing.

Barron’s publishes a weekly chart on the movement gold mining stock prices vs. bullion prices. Recently, the price of the metal has been rising gently while the index of mining stock prices has been rising sharply, suggesting buyers of mining shares expect materially higher prices in the future. Most mining companies are highly leveraged, with operating expenses, debt, and stiff taxes. Traditionally, when the price of gold goes up, most other stocks go down. Mario Gabelli, a well-known and respected investor, expects 2021 gross margins to decline.

Recently, there has been an increase in the number of people believing that there is a reasonable chance of a ”blue wave” coming in the election, with the Democratic-Socialists winning the Presidency and both houses of Congress. If that were to happen, many believe taxpayers and consumers would forfeit twice, both with taxes and inflation rising measurably. If the “blue wave” does not materialize, it is likely that only accelerating inflation will cause the squeeze on gross margins that Mario expects. Both party’s policies will lead to an increased cost of living. Under any of the feared circumstances, the long-awaited relative price performance of some value stocks will likely improve.

The Poor History of Escaping from Cash
In the last fifty years or so, we have seen attempts to escape expected sharp gains in inflation, leading to the liquidation of some assets like cash in order to invest in “real assets”. Remember when the Japanese bought high-priced golf courses around the world to escape their inflation. They paid premium prices for classic real estate, e.g. Rockefeller Center.

For perhaps twenty years, Chinese citizens and relatives of political people have been exporting their wealth to Western countries whenever they could.

In the West, the wealthy have bid up popular pieces of art to ever higher prices. Many financial writers scoffed at the high prices paid for these foolish purchases, not recognizing that the buyers were actually selling an over-priced currency held in surplus. Perhaps this is what is in the mind of the current “goldbugs”?

My guess in all these cases, even measuring at their lower exit prices, the exporters will come out ahead of those that stayed completely in their own currency.

What to do?

1. Make a list of your current assets and resources net of obligations. Put the list in descending order as a percentage of wealth.
2. Pay particular attention to the top half of the wealth pile and ask if you would choose to have that much of your wealth so exposed today.
3. Staying with the top 50% of the list, what could negatively impact its value. Separate the list into general calamities and specific problems, e.g. labor problems combined with unfavorable governments.
4. Determine whether there are hedging or opposite vehicles for each specific risk, as well as more general risks. Energy and airlines are opposite vehicles.
5. View the costs of hedging or contrary investments as an insurance premium, much like what you might pay to fully insure your home or jewels.
6. Rearrange your assets with the potential gains and losses, including the theoretical insurance premiums. 
7. Repeat once a year.

Please share your thoughts with me on the subjects and approaches mentioned.

 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/07/july-4th-lesson-need-to-hire-wise-not.html

https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.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 - 2018

A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.