Too Many Short-Term Worries To Pick Long-Term Winners - Weekly Blog # 946

 

  

 

Mike Lipper’s Monday Morning Musings

 

Too Many Short-Term Worries

To Pick Long-Term Winners

 

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

 

          

 

Current Concerns

Both the management of our international and domestic actions increasingly seem to be personality driven, and for the moment have at best a one-year focus. The level of smart intelligence applied is from a smaller and smaller number of people. The level of wisdom applied to Iran, Israel, and the greater middle east does not appear to be working. Observers believe it will take a considerable time to totally clear the Straits, while pictures of shopping areas in Iran show them to be well stocked.

 

On the domestic side, there does not appear to be recognition that large portions of the workforce are not working, at least regularly for taxable pay. Part of the problem is people in government believing in test scores and mandated promotions. Homes are stressed and less and less people have the education desired by companies and governments to find qualified people.

 

The new Chair of the Federal Reserve appears to recognize these problems and finds government-generated statistics to be moderately helpful at best. He believes the private economy can supply better numbers. One of the time series I look at each Saturday morning is the list of weekly prices in The Wall Street Journal (WSJ), covering 72 commodities, currencies, ETFs, and securities prices. For many weeks the two largest weekly changes at the top and bottom of the list may have been deceptive. In the current week the two top performers were the KOPSI (South Korean stock prices) +11.43% and the Nikkei (Japanese stock prices) +7.92%. The two biggest decliners were NYMEX Crude -9.75% and NYMEX Crude (US listed) -8.14%. The third numbers in array were +3.64% and -6.57%. Thus, four out of seventy-two were extreme and perhaps only of use to specific traders.

 

Turning to the securities markets which have also been shifting in terms of importance. When our Grandparents followed the market, they looked at the Dow Jones Industrial Average (DJIA), which was carried in most newspapers and on most radio stations. As financial intuitions became larger, they were followed too, as well as the brokers servicing them. Additionally, larger individuals that somewhat competed with them followed the Standard & Poor’s 500 (S&P 500), which was on most wire (electric) services.

 

I am suggesting that the growth of relatively new Technology companies, particularly those involved with “AI” captured in the NASDAQ Composite, is more of a speculative market as many of these companies have only been publicly traded for a few years. One way to see the difference between those stocks tracked by the S&P 500 and the NASDAQ is to look at the percent of new lows vs the percent of new highs. For this week new lows on the NASDAQ were 65% of new highs vs. 47% on the SWX. Another way to look at this picture is to use the percentage of stocks on the new low list, which was 46% for the NASDAQ and 53% for the NYSE. This would indicate that older and larger companies on the “Big Board” are portraying more problems on the NASDAQ. I suspect that a relatively higher portion of “AI” related companies trade on the NASDAQ. If this is true, it should help their outlook.

 

This weekend’s development changes everything. You don’t have to accept my views, but you should understand them and I will be happy to communicate with you.

 

Many of us are impacted by what our family passes on to us, long before we realize how the world really works. Fred Trump, a real estate operator sitting in Queens, New York passed on to his two sons the fears generated by President Hoover’s economic recession. The recession created encampments of unemployed workers, which were then labeled after the President. The current President grew up hearing these deep concerns without a fully understanding the 1929 Wall Street crash. The crash bottomed before the next President, FDR and his “Harvard Brain Trust”, took over in 1933. They turned the Hoover recession, caused by lose-money and the Smoot Hawley tariff, into a depression. FDR was the third of four structuralist presidents, after Andrew Jackson and FDR’s distant cousin Teddy Roosevelt. It was his various actions that took a serious recession into a much deeper and longer depression and was one of the causes of the rise in military governance in Italy. Germany and Japan were the alliance that created WW II. But the current restructures’ President Trump, who by personality and political skills, not policies, is much closer to FDR than he recognizes, panicked this weekend. He very likely saw a depression coming and looked at his battle with Iran as a costly distraction. He is now anxious to end his war with Iran to prevent the 1930s type depression he fears.

 

Longer-Term View

At times I feel that I am the only one focused on investing for my grandchildren and now great grandchildren. With them in mind I look at past “bull markets”, which indicate that it is rare for leading investments may repeat in the next “bull market” and increasingly that is where I choose to devote my time.

 

Any suggestions are most desired, as few people seem to think that way.

                                         

 

 

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Mike Lipper's Blog: Is This the Last Hurrah? - Weekly Blog # 945

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Mike Lipper's Blog: Warnings Increasing - Weekly Blog # 943

 

 

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Not Yet Ready for a long-term Solution - Weekly Blog # 936

 

 

 

Mike Lipper’s Monday Morning Musings

 

Not Yet Ready for a long-term Solution

  

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

 

 

 

Preface

I was hoping to start a series of blogs on the selection of smart securities investment strategies for multi-generational ownership. Unfortunately, the current data does not lead to a positive view. The breakdown of the twenty-hour cease fire negotiation with the Iranians confirms that this was a week of data confusion. The historical odds were against progress in the search for political and economic solutions.

 

Our Side

The investment mode for the week is captured by the changes in the American Association of Individual Investors (AAII) sample survey of the next six month’s market outlook. The bullish outlook improved slightly to 35.7% from 33.6% the prior week, a gain of 2.1% in a not highly disciplined survey. What is perhaps a little more insightful is a drop in the bearish measure to 43.0% from 51.4%, a decline of 8.4 %. During the survey week, many pundits were enthused about the forthcoming ceasefire meeting. (I expect Sunday morning’s announcement of a failure to get an agreement will materially impact this coming week’s results.)

 

The two largest stock market exchanges reflected different views, with only 31% of NYSE stocks falling vs 53% of NASDAQ stocks declining. (The NASDAQ market has younger, more speculative companies, with a larger number of companies reporting losses, including some private debt funds.)

 

Consumer sentiment was reported to be lowest in 70 years. Moody’s (*) raised the chance of a recession in the next 12 months to 48.6%. One of their executives is quoted as saying “we could already be in a recession”. 

(*) Owned in managed accounts.

 

Iranians’ View

The first thing to remember is that Iran is the modern name for Persia, which was the dominant political/military power in the Middle East for hundreds of years. Persia was briefly lost to Alexander the Great and later to the Ottomans but was never effectively occupied by foreign forces.

 

The current view of the Iranians is that Trump is losing this war. He is driven to achieve a quick victory to guarantee a positive mid-term election this year, at least in the House. The Iranians are believers in the German strategist Carl von Clausewitz’s statement that “war is an instrument of policy by other means”. Our President went to a military high school, but I believe he at best learned infantry tactics, not strategy. He did not participate in the ROTC at University of Pennsylvania. The current Secretary of War did not have any professional exposure at West Point or VMI and thus was not schooled in strategy. One of Clausewitz’s beliefs was getting the other side to give up the will to fight. Unfortunately, since WWII the US has won wars but lost the peace in getting their opponent to give up the willingness to fight. The last time we achieved it was through the Marshal Plan, named after General George Marshal a graduate of VMI who rebuilt the industrial strength of Germany.

 

While the potential for nuclear warfare was a concern, the far greater risk to the US, Britain, Europe, Mid East, Africa, Latin America, and Asia were already active sleeper cells. At this point we have not yet organized an effective counterforce.

 

It is no wonder the weekend discussions did not produce positive results. Consequently, it may be too early to invest new long-term money.

 

These are controversial views. Please exchange your thoughts. I am always a student and need to learn.

                                        

 

 

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Mike Lipper's Blog: We Have a Management Problem - Weekly Blog # 935

Mike Lipper's Blog: Is History Rhyming Again? - Weekly Blog # 934

Mike Lipper's Blog: Bifocal Analysis: Short & Long-Term - Weekly Blog # 933

 

 

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We Have a Management Problem - Weekly Blog # 935

 

 

 

Mike Lipper’s Monday Morning Musings 

We Have a Management Problem

 

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

 

                         

 

The Founding Fathers Saw it

When unsuccessful in getting George Washington to accept the title of King they decided to name him President, a person who presides over others that are powerful. Notice, they did not choose Executive or Manager. Interesting.

 

Today, the elected leader of the country comes from the commercial world and governs as a Chief Executive. Interesting. The difference between the two labels is that the presiding officer needs to work with other elected officers and not command his or her views become absolute commands.

 

Different Styles = Different Results

The largest owner/leader of a private family company has only the marketplace or regulator that prevents almost complete dictatorial power. This is reinforced by having family members in the named positions. It is worth noting, rarely if ever is one of the senior family members hired away to run a separate public company.  Interesting.

 

One of the realities of managing a successful company is that senior people are often hired away to run competitive companies. GE, JP Morgan Chase*, and Apple* are good examples.

* Indicates shares owned in personal and managed accounts. Interesting

 

The Selling Problem

Emotionally, selling is much more difficult than buying. Afterall, buying is an act of new faith in both a stock and the individual making the decision. At the time of purchase the stock position is the single best bet the investor can make.

 

Selling sometimes involves disappointment in the stock or can be the need for account liquidity. It is like the pain of selling one’s children or losing a personal extremity, but at the time of sale it is the least loved stock in the portfolio. Emotionally it is relatively easy to set up a buying program that purchases a position over time, such as buying a certain number of shares each month for the next year as one gains conviction. However, selling is an entirely different mindset as it is painful to lose a limb or a child, the quicker the better. That may be why more shares have been sold at declining prices on down days for the last six months. Since selling is more emotional it probably makes tactical sense to sell over time. Interesting

 

Reasons to Consider Selling Programs

1. The US has the highest inflation rate of all the advanced economies.
2. Iran has a functioning economy, despite the bombing.
3. There are only 3 mutual fund sector averages that beat the +13.66% 10-year compound average of S&P 500 index funds; Science & Tech +17.82%, Precious Metals Equity +16.77%, and Large-Cap Growth +14.61%. My guess is that it is unlikely these three sectors will outperform the average US diversified fund’s return of +11.16%, nor will they produce double digit gains in the next 10 years.
4. The “Hyperscalers” are commodity players that depend on the long-term prices of fuels for their plants.
5. The Walmart (stock) Recession Signal +10.89% vs the S&P Luxury Price Average -14.8%.
6. Fixed Income strategies in the future won’t follow historical patterns.
7. The President has borrowed the most money and runs the government with biggest deficit. They are urging retail investors to buy debt securities.
8. Ray Dalio believes in the histories of recessions, concluding we are currently in stage five on the way to six.
9. Fitch has noted that the default rate on private debt has risen.
10. The ECRI industrial price index has risen to 135.06, which is a +14.21% increase in the last 12 months.          
11. Note: The job gains for March included jobs for healthcare, which require larger amounts of social assistance and produce less GDP per person.
12. Homer Jenkins Jr. noted in the WSJ that “Trump is a lame duck with low appeal and a surplus of voter distrust.” 
13. We won’t have peace in the middle east until Iran’s sponsorship of death and destruction in the US, UK, Europe, Mideast, Africa, and Asia ends.

 

Interesting. Be Careful                                    

                                        

 

 

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Mike Lipper's Blog: Is History Rhyming Again? - Weekly Blog # 934

Mike Lipper's Blog: Bifocal Analysis: Short & Long-Term - Weekly Blog # 933

Mike Lipper's Blog: This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932

 

 

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Is History Rhyming Again? - Weekly Blog # 934

 

 

 

Mike Lipper’s Monday Morning Musings

 

Is History Rhyming Again?

 

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

 

 

 

Preface

Before the New Jersey Symphony’s inspirational playing of Beethoven’s Pastoral Symphony there was a brief concert by the New Jersey Symphony Youth Orchestra’s Academy Orchestra, who are gifted and wonderful. However, what was more wonderful was thinking that these talented young people not only learned their musical skills very well but also learned a bit of the history and discipline of classical music. Hopefully, it will give them the skills to manage the messed-up world we are passing on to them.

 

I couldn’t help my own burdened brain sitting there Friday night after what may have been the most important stock market week in some time. The Standard & Poor’s 500 pierced the low set in September. Classically trained market analysts will likely suggest how difficult it will be for this most important of all indicators to quickly recover the 10% loss from its high point. Pundits will likely blame the current military and diplomatic failures to end the war.

 

Those in leadership positions are not paying attention to ancient history. Iran is the modern name of what was called Persia for centuries. The rulers of Persia controlled much of what passed through the “silk road”, which not only passed new foods to the western world but also mathematics, science, paper money, and gun powder. Persia had a large and powerful army that kept would be conquerors away, although it was not particularly successful at adding to its piece of the Asian land mass.

 

I believe the main threat to the US and other countries is not their incipient nuclear warfare, but their successful sponsorship of proxies who damage other established governments and societies through the destruction of people and property. Recently, the US experienced a couple of wanton killings carried out by US citizens who received local training and support. We have seen the Iranians do this not only here, but in the UK, Europe, Middle East, and Africa. Because their sleeper cells easily entered the US through an open border, we don’t exactly know the size and capability of the problem.

 

The US has a history of winning wars and losing the peace because we are not very good as occupiers. Also, it is worth pointing out that Iran has never successfully been occupied by foreigners. In my opinion, the dream of a fully formed new government structure for the country appears naïve.

 

In exposing the problems which led to the market drop, we need to address an approximately 100-year period of excessive debt creation and the confusion between a top-down education and a bottom-up learning process.

 

This Week & Beyond

We got one violent rally this past week and could get one or more this coming week because a gap opened between the S&P 500 and NASDAQ on Friday. The gap must normally be filled before a sustained move can occur. Friday can perhaps be summed up in three numbers:

• S&P 500 -1.67%
• Price of oil +7.07%
• ECRI industrial prices rallied again to the 130 level, putting the year-over-year gain at +9.25%

In the first three days of the week there was a positive tone to US stock prices, but they were swamped with declines in the last two days, putting the SWX down for five straight weeks and on Friday it fell below its September returns.

 

The declines appeared to be coming from retail-oriented accounts, many of which were housed at large retail brokerage firms years ago. Coincidentally, both the number of listed stocks and the number of primary retail brokerage firms significantly declined during this period. They were replaced by larger more diversified firms whose brokers switched from commissions to fees, making them look more like “wealth managers”. However, many of them are still short-term oriented and prefer stock exchange listed securities for their accounts. Most of these new recruits to the business have not experienced a full economic recession and very few investors or investment committee members have any direct experience with depressions.

 

The latter point, in my opinion, is causing great risk to the market, not that I can estimate the starting date of a new depression. However, as someone who has studied old races and other ancient track conditions, I am conscious that bad things do happen. Thus, I feel a need when examining investment possibilities to include an alternative negative future in reviewing future strategies. There are not many investors or advisers who do.

 

Most down markets, but not all, are caused by a forced repayment of debt at an inappropriate time, like in William Shakespeare’s “The Merchant of Venice”, or in margin calls. We may be due for such a period!! Coming out of the expansion of most global economies after WWI in the nineteen twenties, there was a ballooning of debt creation. Borrowing against securities became popular with retail investors in the US and other countries, particularly by those of the farm community in the US. By the late 1920s, many US farmers, merchants, suppliers, and local small banks were heavily in debt, with their crops and land used as collateral. When the price for domestic crops was impacted by lower-priced foreign competition, it led to dire conditions. They appealed to their congressmen for help in putting tariffs on incoming food items and they convinced a reluctant President to enact The Smoot-Hawley tariffs, causing foreign governments to respond in kind. This led to the disruption of global trade, which was one of the initial causes of the recession. The recession was turned into a depression by a new government which needed a ten-year long depression and a new World War to pull us out of this self-administered trouble. I AM NOT PREDICTING THIS, BUT I AM SAYING WE SHOULD CONSIDER IT A REAL POSSIBILITY.      

 

Caution: As these worries are disturbing, they should not be discarded, even though none of us wish they come to be. However, prudence requires that they should be examined regularly to see ensure their chance of occurring stays small and doesn’t creep up to a higher probability. The odds still favor expansion.

 

Please share your views which can help us.      

 

 

 

 

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Mike Lipper's Blog: Bifocal Analysis: Short & Long-Term - Weekly Blog # 933

Mike Lipper's Blog: This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932

Mike Lipper's Blog: Premature: Buying Program to Begin Soon? - Weekly Blog # 931

 

 

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Is This The Week That Ends Instability? - Weekly Blog # 924

 

 

 

Mike Lipper’s Monday Morning Musings

 

Is This The Week That Ends Instability?

 

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

 Preface

I believe it was Lenin who said there are decades when nothing happens; and there are weeks when decades happen. Possibly, the four-day trading week beginning this coming Tuesday is such a period. In both the Financial Times and her podcast, Liz Ann Sonders of Charles Schwab* introduced the concept of the period we are going through as an extended period of instability. I am suggesting it is possible the beginning of the end of this period may have begun.

*Shares held in in managed and personal accounts.

 

Fund Data Sets the Table

Whether one invests in mutual funds or not, one should recognize that not only do many people invest in them, but more importantly, many fund managers get their training at fund shops. Thus, one can get an understanding of the institutional mind set by looking at fund data. In the five years ended last Thursday, the London Stock Exchange Group published my old firm’s weekly study of 105 equity related mutual fund peer-groups average performances.

 

The average performance of S&P 500 Index funds was 14.05% compounded for the past five years.  There were only five peer group averages that were better: Precious Metals Equity Funds +21.50%, Energy MLP Funds +20.79%, Commodities Precious Metals Funds +18.75%, Natural Resources Funds +17.30%, and Global Natural Resources Funds +16.05%.  There were just two better performing thematic categories, precious metals and energy. The narrowness of performance leadership proves how difficult it was to pick winners for the past five years. The leadership crown was indeed unstable.

 

Another way to identify the instability in economic data is to examine the tails of the best and worst 2 items shown in Saturday’s WSJ weekly price chart. The best was Silver +11.67% and the second best was the KOPSI +5.55%. The second worst price performance was Financials -2.33%, which was half as bad as Corn -4.71%, the worst performer. The gaps between the top two leaders and laggards suggest concentration is at play.

 

Turning Points Possible Next Week

On Tuesday, probably in the late afternoon, SCOTUS (Supreme Court of the US) is expected to announce its decision on the IEEPA tariff. The President has said he is prepared for an unfavorable ruling and has substitute measures in mind. At best this will be disruptive, and possibly inflationary. The ECRI industrial price index, which is normally slow moving, rose to 120.49% from the prior week’s level of 117.42%.

 

Markets are anticipating problems, either from Tariffs or possibly Iran. Sixty-two percent of the stocks traded on the New York Stock Exchange (NYSE) rose last week, while only fifty-three percent rose on the NASDAQ. The NASDAQ trades more tech stocks and the shares of younger companies. Thus, the junior exchange is likely to react more than the “Big Board” to news events. Retail investors, when not gambling, are more active on the junior market. One possible measure of this is the American Association of Individual Investors (AAII) sample survey, which reported 49.5% bullish for the next six months, up from 42.5% the prior week. What may be more significant is the 28.2% that were bearish. Many professional traders believe “the public” is wrong at turning points.

 

The Davos meeting begins Tuesday, with many political and economic leaders present and chatting. One doesn’t know what will be discussed and how meaningful the meetings will be.

 

Keep us Informed as to any Changes in Your Views.   

 

 

 

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Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923

Mike Lipper's Blog: Data May Be Signaling Change - Weekly Blog # 922

Mike Lipper's Blog: Investment Time Horizon Should Pick How You Measure the Results - Weekly Blog # 921

 

 

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It May Be Early - Weekly Blog # 898

 

 

 

Mike Lipper’s Monday Morning Musings

 

It May Be Early

 

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

 

 

 

A Usual Trap

A classic mistake in making future plans is focusing mainly on the present. In search of an investment policy for the next few years or longer, one should look at the causes of the main trends, not the size of the tariffs that have been announced.

 

The key force behind the announcements on tariffs is Donald Trump. His background is one of complex negotiations evolved from materially different views of how he sees the present and the future. I believe The President saw a critical problem of unfair trading terms facing the U.S. and saw a way to change the terms in favor of the country. He saw a way to solve the problem through meaningful discussion with the powers on the other side. The key was getting the right people around the table.

 

The core elements of unfairness are to be found in non-tariff trade barriers (NTB) erected by commercial interests with official or unofficial government support. (A number of examples were listed in last week’s blog, copy available.) While there is no published total of each country’s NTB effects, some experts believe their impact is twice the level of tariffs applied.

 

Mr. Trump’s way of dealing with foreign countries is to make the host nation an ally by using the size of US tariffs as a hammer. This is the reason behind the high announced tariffs, which is where President Trump expects the real bargaining to begin. I expect negotiations with major trading partners to take most of the summer. We may never fully understand the various changes to NTB’s, but a good clue will be changes to US tariffs.

 

Clearly there is another element to the aggregate size of the final US tariffs, the amount of cash expected to be paid to the US Treasury. This needs to be meaningful enough to keep the growth of the annual deficit acceptable to an unknown number of Republican Senators.

 

Most of these should be settled in the fall and early winter, so they do not unduly impact the mid-term elections. The economic background to the elections may be influenced by layoffs and the administration’s attempt to expand the economy. Additionally, further international actions may be the cause of how some state elections turn out.

 

The current crosswinds shown below may also impact the level of markets during this period:

1. After a period of outflows, T. Rowe Price is cutting staff.
2. Freight railroads are growing from China to Iran and Spain, for US continental trains, and other trains from Canada to Mexico.
3. Tariffs may encourage smuggling.
4. The latest weekly American Association of Individual Investors (AAII) sample survey showed a 39% positive and negative 6-month outlook.
5. A study of structural bear markets shows the average breakeven to be about 9 years.
6. The critical operating problems facing the US government is no different than those facing commercial and non-profit activities, a focus on effectiveness, not efficiency.
7. Jaimie Dimon has shared the following thoughts:

• Tariffs will be inflationary
• US reserve currency status rests on military superiority
• Markets are not low
• Lessons can be learned from the turnaround of Detroit and problems created (and elongated) during the 1929 crash
• Dollar weakness helps US multinationals 

As usual, I hope you will share your insights on the various thoughts expressed.

 

 

 

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Mike Lipper's Blog: Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

Mike Lipper's Blog: Expectations: 3rd 20%+ Gain - Stagflation - Weekly Blog # 896

Mike Lipper's Blog: Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

 

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Now, The Most Dangerous Time to Trade

Introduction

Some pseudo-sophisticate might say the most dangerous time to trade any market is when it is open for trading. For traders initiating a trade that can be costly to unwind, there is no worse time than when the market is slow, with little volume and in a long, flat pattern. The very trap of being the worse time could also be the best time for investors.

For Traders

For many years I have watched the actions of traders on various broker/dealer trading desks. At times their biggest risk is boredom. In a slow, flat market (which we have had for some time) watching their screens, reporting only minor price changes can drive these activists crazy. To create some action they find prices that they follow closely which they believe they understand better than the market and create a long position or in a minor number of cases a short position. Because the traders need to earn more than the cost of capital assigned to them they multiply the small expected moves by the use of borrowed capital in some form. A swift breakout or breakdown from the price level of their position can have a dramatic impact on the value of their positions, the bonuses, and ultimately their employment. In the current environment the trading desks staffed with portfolio managers at hedge funds play similar games as the old dealer desks, except with more modern training they are likely to use derivatives as their medium.

For Investors

Perhaps the key difference between a trader and an investor is the time to success (or failure). The trader is short-term oriented in terms of hours, days, or possibly weeks. An investor is much more concerned in terms of years, often a number of years, which is why we developed the Lipper Time Span Portfolios^TM concept. We manage money for the long-term, and in some cases beyond one’s lifetime. However, the long-term starts with now, at today’s price.

Jumping Off Point

We have written in past posts that it is somewhat natural to be in a reasonably flat stock price picture. Equity prices have raced ahead of the slow, uncertain economic factors that are producing limited gains in top line revenues. Current prices reflect largely present and expected earnings gains coming from profit margin increases due to low commodity prices, more efficient use of labor, foreign earnings translated into US dollars, and buy-backs. Without future revenue gains much of the above-earnings increase elements will eventually reverse.

Two Bullish Strategies

The strategists at Charles Schwab believe that we will enjoy a grinding higher stock market. With core inflation, excluding food and energy, growing at a current 2.3% rate, Schwab and most of the rest of the strategists are looking forward to the early stages of an interest rate rise. Also the sentiment index of home builders is rising at a faster rate than new starts.

The strategists at JP Morgan proclaim that they are global investors to some degree, escaping the geographic labeling in asset allocation. Nevertheless, they point out that for many of the normal investment measures, US stocks are priced above their ten-year averages. On the other hand they point out that the Asian Emerging Market stocks are selling below their ten year averages in terms of forward price/earnings ratios, price/book value, and price/cash flow. This Asian bias is similar to our own which favors Asia over Europe, even though a number of the funds we use are currently betting in favor of Europe.

Two Causes of Concern

The first is Moody’s has raised its forward looking ratio of default frequencies for US and Canadian High Yield issues. From an abnormally low level the expected rate increase is back in the more normal range. This could be influenced by a concern for the oil and gas High Yield paper or  too accommodative underwriting standards in the past. I tend to pay attention to the fixed income market from the perspective of an equity investor. Often the risk avoidance mechanisms of bond holders and traders act as the canary in the stock market.

The second cause for concern is much more complex and controversial. It starts with the relief rally the world stock markets delivered for the week ending July 15^th  as reported by The Economist. All 44 of markets it tracks rose for the week in US dollar terms. Only 9 declined in local currency terms. As a contrarian, any time I see all of the passengers in a boat on one side I fear a collapse. Many market participants view the news of the week positive from Greece, China, and Iran. Perhaps, the US Mutual Fund and Exchange Traded Fund investors were using the relief rallies to be net redeemers of both domestic and international funds for the first time. Maybe they are right or at least raising the same questions that I do in terms of Greece, China, and Iran.

The decision to fund Greece’s place in the euro with German money in the long run, in my opinion weakens the euro and will not correct the larger than treaty permitted deficits for a number of European countries. The cost of losing Greece for awhile is much smaller than the damage in keeping it.

In many ways the current Chinese government is the most effective government in the world. This may be true due to its command structure or the skills of the present leadership learned at the party’s political school. I am afraid what has been taught is the use of socially determined bailout mechanisms. Bailouts perpetuate poor behavior and in the end prove to be more costly to the society than letting failures occur. In quick order they will be replaced by newer and sounder forces.

In terms of the agreement with Iran, my fear is that we have seen this movie before in terms of our experiences in and after WWI and the creation of WWII.

Once again we are experiencing the power and “wisdom” of an unelected woman in terms of the second Mrs. Wilson (VJ) and the lack of understanding by Neville Chamberlin (VJ and crew). The temporary avoidance of conflict comes at a much larger price of future innocent deaths.

As we have not yet raised cash, and since Gold and TIPS are not rising in price, let us hope that I am wrong.

Questions of the week:

1. How are you going to “play” the change in direction of the current market? 

Question 2: What are your long term investment worries? 

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