Searching for Future Long-Term Picks: Gathering Assets, Reasons to Search - Weekly Blog # 948

 

 

 

Mike Lipper’s Monday Morning Musings

 

Searching for Future Long-Term Picks:

Gathering Assets, Reasons to Search

 

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

 

          

 

 

Inputs from This Week

1. The Consumer Confidence Index was 91.4 vs the 94.4 expected. The index was however up from last month’s 90.6.
2. The American Association of Individual Investors (AAII) sample survey projections for next six months are Bullish 31.4% vs the prior week’s 42.3%, Bearish 42.3% vs the prior week’s 36.3%.
3. Workforce participation of 61.4% is the lowest since the covid readings. (We have made working on payroll unattractive for some.)
4. In some European countries the number of air conditioners is small, and some are even being removed. (The founder of modern Singapore stated that the installation of “AC” led to the economic growth, enabling it to become the fifth richest economy in the world.)

 

Future Investment Problems

1. Americans misreading foreign data. The foreign performance of indices and positions is converted into US dollars from the local currency. As the US dollar is currently stronger than most other currencies, it makes foreign investments look more attractive. We tend to forget that most US investors temporarily rent foreign securities. When we sell in declining markets local buyers are often the only buyers and they are not generous.
2. When looking at the statics of a company, investors look at where the fiscal headquarters of the company is located, not where the product or service is sold. Consequently, many investors currently think they are investing in the UK, Taiwan, or South Korea. The Financial Times 100 largest companies, which dominate the local British stock market, makes almost none of its operating earnings are earned in the UK. It is my guess that a good many US investors think their rapidly expanding earnings are coming from South Korea and Taiwan, not by what is happening in the US.
3. Investors are often attracted to various securities indices due to a handful of the leading performing issues within the index. These companies, at least for a while, perform better than the indices. However, history tells us that it is only a matter of time before the leaders become laggards and detract from the performance of the index.
4. One recent concern of mine is that a senior American General in Europe is resigning. He is a four-star general with a very good battle record. I don’t believe it is an appropriate time to reduce our military leadership anywhere, particularly in Europe.
5. As a portfolio manager for long-term beneficiaries, I am very conscious of the variability of performance records. Looking at the recent five-year period, only six mutual fund sectors had average performance better than the S&P 500 Index Funds average. For the ten-year period, only Large-Cap Growth Funds and Domestic and Global Science and Technology Funds beat the S&P 500 Index Funds average. Considering the CEOs of many companies don’t last beyond five years, with even fewer lasting ten years, I am particularly nervous about those whose stock prices depend on “AI” products and services. (I wonder how many repeat orders there are for their present products and services.) Many of last year’s leaders are selling below last year’s performance ranks.

 

Possible Buys

The one major stock group selling below its 2000 price is Healthcare. I do not know these stocks well and tend to use specialty funds to invest in the sector. I will probably reach sell decisions without much help from the industry, but that may be a long time from now. Without a lot of knowledge, I am starting my learning efforts with Johnson & Johnson and CVS Health. I like their strategies but don’t know their tactics, managements, and their outlooks for their critical present and future drugs. Furthermore, I don’t know the outlook for government regulation. I need any help subscribers can provide.  

                                         

US Gifts to Others

Those in the US are incredibly lucky, or if you prefer God Given, considering the benefits/gifts we have received. However, it is wise to note that some of what we have given to the rest of the world is not always beneficial, as shown below:

1. A constitution that enshrines the rights of minorities.
2. An education process that attracts students from all over the world, who return to their homelands and contribute to them.
3. A military power that has critically helped defend other countries.
4. Innovation, which has produced great things for the world. 

 

Hope you had a good July 4th and life gets better.

 

 

 

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

Mike Lipper's Blog: What is Pending and When - Weekly Blog # 947

Mike Lipper's Blog: Too Many Short-Term Worries To Pick Long-Term Winners - Weekly Blog # 946

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

 

 

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A. Michael Lipper, CFA

 

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Warnings Increasing - Weekly Blog # 943

 

 

 

Mike Lipper’s Monday Morning Musings

 

Warnings Increasing

 

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

 

          

 

Preface

I cannot predict the future, and I believe none can. The best I can do is use a life-long habit of dealing with chances of what may happen. In other words, odds are one possibility is more likely than another.

 

We all hope that the various problems facing the financial world will be quickly solved to our personal benefit. However, as a trained analyst I am compelled to increasingly doubt the expressed views found in most US media and by other pundits which are not completely echoed beyond our borders. These items came out last week.

 

Worry List in Chronological Order

1. The number of farm bankruptcies rose 40%. (The same thing happened before the depression.)
2. The University of Michigan Consumer Confidence Survey dropped to 93.1 from 93.7.
3. Another Fund Management Company is looking to find a new home - Dimensional Fund Advisors. (I expect there will be others.)
4. Perella Weinberg, an investment bank, is laying off 10 partners and 10% of the firm. (More to come?)
5. Gary Shelling predicts a 30 % chance of a S&P 500 bear market in 2026 and a 60-70% chance in 2027.
6. Canada has economically contracted for 3 of the past 5 quarters, falling into a recession. (The US is their largest customer, and our companies own lots of Canadian companies.)
7. Prudential Insurance, Meta Holdings, and Johnson & Johnson, are compelled to announce layoffs.
8. On Friday, the last day of the month, more stocks were sold on a decline on both the NYSE and NASDAQ. However, this may be typical selling before the weekend.
9. In May only three S&P 500 sectors rose: InfoTech+5.6%, Consumer Discretionary +0.26%, and Healthcare +0.21%. Eight sectors fell.
10. The three forces that led to the market index rising were:  Affluent Consumers, “AI” investments, and Asset Allocation. (Contrary points: Inflation was up more than wages. Other industries that were similar and didn’t work out: canals, railroads, radio, airlines, atomic energy, and computers. Bonds were a safe way to beat stocks and “private debt and equity”) 

 

Warning: Be Careful, Let Others Have Some of your Winners.

                                        

 

 

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

Mike Lipper's Blog: Rhymes + Future Opportunities - Weekly Blog # 942

Mike Lipper's Blog: Many Trends Within the Same Market - Weekly Blog # 941

Mike Lipper's Blog: What Can Go Wrong - Weekly Blog # 940

 

 

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A. Michael Lipper, CFA

 

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"Things are Seldom what they Seem" - Weekly Blog # 599

Mike Lipper’s Monday Morning Musings

"Things are Seldom what they Seem"

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

Premise 
Things are seldom what they seem is an appropriate maxim for military reconnaissance, home buyers, merger & acquisition specialists, political and security analysts, and most importantly long-term surviving investors. When surface observations prove to be accurate, popular rewards tend to be small and when they are wrong the penalties can be large. This week I share three instances where a deeper understanding of what is popularly "known" are examined more broadly.

"Informed Prices" 
On Friday the Dow Jones Industrial average fell 255 points, with 67 of those points in the last half hour. Before using these "knowns", one should examine the makeup of the numbers and their implications. First, almost two-thirds of the decline was caused by just two stocks, Boeing and Johnson & Johnson. Boeing's fall is particularly significant because the DJIA is a price weighted average and it’s fall disproportionately impacted the result, as it is the highest price stock in the index.

As an analyst/portfolio manager, the larger implication lies in reviewing the investment selection criteria. Statistically oriented pundits and marketers generally want to sum up the company's results using factors such as changes in earnings, returns on equity or capital, revenues, or book values etc.

Both the price declines of Boeing and J&J were responses to internal disclosures. In Boeing's case it was a reaction to emails from the chief pilot expressing doubts on the Max 737. In J&J's case it was the discovery of a single batch of contaminated product. Neither of these disclosures were or could have been captured by any known factors. Ever since investors have compared investments and managers they have utilized screens to highlight and understand differences. Rarely was success the result of one management being smarter than others, it was often due to comprehending what was not captured in the statics, i.e. patents, customers, locations etc.

In the following market factors for the week I found issues of future importance, which I would be happy to discuss further with subscribers:

1. There were price gaps from earlier in October in all three major stock indices.
2. There were differences in the patterns of the high/low ratios for stocks on the two stock exchanges - NYSE 303/101 and NASDAQ 197/230
3. On the NYSE the volume of shares going up was very close to the number of shares going down.

"Plain English" can be Plain Wrong 
Jason Zweig, in an always interesting column in The Wall Street Journal, described attempts by a member of Congress and the SEC to force mutual funds to issue a new four-page document in "Plain English". Ironically, this is an effort to correct errors of judgement by both the Congress and the SEC. A generation or two ago there used to be an active retail market for investments in most cities and towns in ground floor stock brokerage offices. Their longevity was a testament to the value they were providing. They existed because busy people who recognized their lack investment knowledge needed help, the situation is no different today. In many cases the customers', man or woman, provided good service to the investing public and many of their recommendations proved to be profitable for both the investors and the brokerage firms. I believe the average retail investor's returns were superior to those of today, in part due to lower interest rates. Perhaps unconsciously, the SEC destroyed this setup by removing fixed commission rates. (That is not to say that there weren’t some abuses and bad judgments made.)

The SEC has faith in the disclosure of "facts", and numbers are even better. For a while it considered requiring funds to publish their beta numbers, urged on by the late and sometimes great Jack Bogel. Luckily, the requirement was dropped after being ignored and considered something of questionable utility. (It could have had some value as an annual or market phase measures.) Digital representation are an attempt to capture reality. While most critical decisions are reached through analog searches and comparisons, JP Morgan himself said that he did not lend based on collateral, but on character. The new document cannot correct for a poor education. Many successful investors learned early about budgeting their time and resources, without which no four pager or four thousand pager will produce on average, winnings.

When someone asks for my help with their investments, the first thing I should ask is how much time they intend to devote to investing. For those devoting "twenty minutes or less", I suggest that they either find someone they trust to manage their money or just accept one or more fixed rate investments. For the remaining few, I would be happy to introduce you to the multi-level set of investments arts.

"Follow the Leader" is Chasing one's Tail or Worse
As someone, with the help of a great staff, who probably created more lists of leaders and laggards than perhaps any other person, I can appreciate the media and spectators knowing who are at the "tops of the pops". Unfortunately, people don’t evaluate all the short to long-term time periods, or how quickly a name rotates from the leaders lists to the laggard roster. That is a mistake, but it is even worse to not notice the change in market conditions.

As an outsourced chief investment officer and a member of non-profit investment committees, I have seen a growing share of assets devoted to private equity and debt. In a recent article in FT WEALTH devoted to Family offices, a survey showed that over 80% are using private equity investments through funds or fund of funds. They are following the lead of certain Ivy League universities which have been investing in private equity for two generations. In the early years these schools produced results superior to the public market. At one of these investment committee meetings the members were presented with a book authored by one of the in-house chief investment officers, highlighting his success in investing in privates. That was then, today most of the former leaders have completed a year where in aggregate they underperformed the public market measures. What happened? The structure of the market was changed dramatically by the SEC’s efforts to make investing easier.

The way investments are taught in most places focuses almost entirely or totally on the issuer of the securities. However, the company is only one of five forces on the price and utility of investing in the security. The others are the needs of the customer, the compensation for marketing, the profitability of the firms that provide investment management, investment banking and trading, the changing nature of the exchanges, and the attitudes of the reviewers/critics.

The combination of generally declining profitability caused by the SEC’s elimination of fixed rate commissions and the long-term decline in real interest rates altered the commercial needs of the players other than the issuer and dramatically changed the market for privates. For over two generations brokerage firm equity/agency commissions were unprofitable. Their profits came from net interest on margin loans, dealing spreads, underwriting, financial advisory activities and investing for their own accounts.

This led the institutional sales force and eventually the retail sales force to shift to the sale of private securities, either individually or in packaged products of funds. In order to supply their sales forces, many firms got into the business of underwriting or offering private securities. They were often directly or indirectly paid in shares of the products they were selling. While a couple generations ago there were only a few in these markets, now almost all the firms that have survived are there.

At the same time successful managers of private venture funds were regularly coming to market with new merchandise. Owners of private companies therefore had many underwriters and investors competing for an interest in their companies, leading to higher prices. That was sustainable if these companies went public at sufficiently high prices to create profits for all who participated in the build up to the sale. It all worked as long as the IPOs rose in price long enough for all the willing restricted stock to be sold. In 2019 we have seen some IPOs break below the offer price and some have been withdrawn.

I have witnessed first-hand the success that Caltech's investment staff and appropriate consultants have generally had with their privates. They have worked long, hard and smart. I am convinced that there are few groups that have a similar dedication to this effort.

One of the general lessons in investing is that it is difficult to make meaningful gains in crowded trades and they can be very unprofitable if the crowd attempts to stampede out.



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/10/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2019/10/contrarian-bets-and-other-risks-weekly.html

https://mikelipper.blogspot.com/2019/09/mixed-near-term-after-recession.html



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Copyright © 2008 - 2019
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.