An Informative Week with Many Questions - Weekly Blog # 759

Mike Lipper’s Monday Morning Musings

An Informative Week with Many Questions

 

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

                   

 

 

CPI Thursday Morning Pivot or Rotation? 

The readings for the Consumer Price Index and its components were announced before the market opened on Thursday. They were not as high as many expected and market participants treated the less bad news as good news. Many chose to believe the less bad news would embolden the Fed to reduce the size of expected interest rate increases. In effect, the Fed was expected to “pivot”, messaging the market that inflationary increases would be reduced. Their enthusiastic response to the gap opening of the market was not narrowed on either Thursday or Friday.  

 

Market analysts believe that price gaps must be closed before the market can move in the direction of the gap. Most of the time this is the case, but not always. It may take a while. 

 

Market pivots tend to be infrequent, and partially reversed quickly. They can have limited long-term predicative value. However, they can be an early identifier of a meaningful rotation. In this case, the odds seem to favor this pivot not being a significant rotational change. My thinking is based on two inputs. 

 

1.  The mid-term election was largely motivated by a vote against the other side’s leaders and not by a vote in favor of positive growth strategies. Both parties have leadership problems. The Democrats have no fresh leadership with a significant following. The Republicans in some cases did not field attractive candidates and did not match the opposition’s operational talents. With the House of Representatives in the hands of the Republicans, I expect little in the way of new legislation. Many of the expected Executive Orders will also wind up in court. Stagflation will likely be the result. 

2.  Transactional volume will likely be less than expected in a normal bull market. Numerous brokerage firms, investment advisers, and investment bankers, are cutting back on lower producers or those too well compensated.

 

T. Rowe Price Lessons for Investors 

(The following discussion should not be interpreted as a recommendation. T. Rowe is an old personal holding. I have known its CEOs going back to Mr. Price. The firm is investing its capital on broadening its domestic and international marketing and is also developing new distribution channels. Doing so will take time and money to reach the firm’s desired profitability levels. A topic I can address off-line.)

 

T. Rowe Numbers for the Week ended November 11th

• Opened $103.71, closed $133.34 
• Monday-Wednesday share volume in millions of shares:  1.74, 1.85, 1.86 
• Thursday and Friday share volume: 4.49, 5.55 
• Weekly Price Gains: DJ Asset Managers Average +13.92%, T. Rowe +28.57% 
• Institutional Ownership 77.12 % 
• Top 4 shareholders own 26.62 % 
• Thursday’s gap of 5.48% not closed on Friday 

 

While the company is listed on the NYSE, it is essentially an institutional stock owned in some respect by competitors. The size of the price gap and above average gain demonstrates the lack of liquidity on the upside. I don’t know what the liquidity and potential price gap will be on the downside.  

 

Another hint of the professional market dominating the NASDAQ marketplace were the weekly declines as percentage of shares traded: 21.16% for the NYSE vs. 32.85% for the NASDAQ. 

 

Other Thoughts of the Week 

• The IMF believes 1/3 of the world is in recession 
• 7 out of 10 large battery producers are in China 
• With the 2-year and 30-year US Treasury yields at 4.32% and 4.08% respectively, it suggests the minimum expected return on high grade paper will be required for a long time by investors. Could it also mean that this is the maximum safe distribution from high quality accounts in order to preserve principal? 

 

Should real estate investing be divided between current income production and the conversion profits from changing the nature of the property? 

 

Historically, roughly half of small businesses fail within five years. Isn’t it likely this will increase during a period of stagflation? Small company investing has traditionally produced higher returns when large companies are having problems during a stagnant period. However, there will also be offsetting small-cap losses during the period. 

 

What are Your Thoughts? 

 

 

 

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

Mike Lipper's Blog: Are You Getting Value from Numbers? - Weekly Blog # 758

Mike Lipper's Blog: Rarely Found Different Thoughts - Blog # 757

Mike Lipper's Blog: Current and Future Views are Confusing - Weekly blog # 756

 

 

 

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Things are Seldom what they Seem - Weekly Blog # 549

Mike Lipper’s Monday Morning Musings

Things are Seldom what they Seem

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

         


Stock Prices Don’t Follow Headlines (It’s the other way around)

This is being written the Sunday before a much-heralded mid-term election in the United States. As a consequence of being exposed to the so-called professional and social media, one would think the outcome of Tuesday’s election will dictate future stock prices. Not only is this excessively simplistic, it is not historically accurate. The impact will only change the scope and content of the limited number of bills that can pass through both houses and be served up to the White House to approve or veto. Further, no matter which party wins there will be a number of new committee chairpeople, with meaningful changes in staff. As Louis XIV found out, it is difficult to control the empowered nobles. The new chairs will begin to negotiate with members of both parties, an army of lobbyists, and people in the White House. (I am on record with a group of seasoned and senior investment people suggesting that whomever wins the mid-terms is likely to lose the next presidential election, primarily due to their inability to deliver on their campaign promises.

With most participants in a battle for “control” of Capitol Hill focusing on their role in the 2020 campaign, investors should look to history as a guide for the importance of a political party moving stock prices. This weekend I saw a study of the last 12 presidential elections and which party controlled the White House, Senate, and House of Representatives. Of the 12 contests for dominance, there were only two times when one party controlled all three branches of government. Ranking the 12 in terms of the performance of the S&P 500, control of all three branches of government only produced rankings of 6th and 9th. (The intramural score card showed that Republicans and the Democrats evenly split the remaining 10 contests.) I suggest that is exactly what the American voters want, a relatively weak government except during periods of great national stress. Further, in looking at the critical issues decided during the President’s first term, almost none of them were major campaign issues before the President took the Oath of Office.

Despite this somewhat controversial view point, notice the media pronunciations on Sunday through Tuesday trying to tie the stock market moves to various political motives. Instead, wise investors should look at the following elements:

1. On Friday the Dow Jones Industrial Average declined -109.91 points. Some estimate that the decline in the price of Apple (*)  represented about 100 of those points, which doesn’t have a political message. Actually, if one measured from the opening price on the exchange to the last price on the exchange, Apple didn’t move. The decline all occurred in the after-hours trading Thursday night. Because there is a legion of Apple haters, I suspect that in the after-hours dealer markets it was easy to short the stock.
2. The rallies on Thursday and Friday morning look to me to be largely shorts buying to cover their positions.
3. Due to the sudden volatility exhibited last week, all three of the major stock indices have developed price gaps below current prices. Many market analysts believe that most sustainable price trends need to fill any price gaps before they can make a sustainable move.
4. It is reported that asset managers have reduced their positions in US equity futures.
5. Looking at the Weekend WSJ edition’s chart of the week, in evaluating the performance of 72 measures of stock indices, commodities, ETFs, and currencies, 48 were higher and 24 were lower. 
6. Based on market history we have just entered the most favored six months of the year, November through April.
7. Perhaps the most long-lasting element is that governments are slowly addressing the global retirement capital deficit. The US government is increasing the limits that individuals can put into their 401k for company matching.

What May Be the Most Dangerous Four Letter Word

Could a four letter word be the most dangerous word in the financial community? And the word is bond, not James, but the contract that used to be called the certificate of confiscation.
           
There has been a net outflow from bond mutual funds for the last six weeks. Are investors waking up to five factors?

1. In the last five years the average taxable bond fund has produced a total reinvested pretax return of +1.79%. Many bond investors use the income from bonds to meet their current spending needs. This implies that they are not getting the highest return element in bond investing, which is the compounding of interest on interest. Further, inflation has probably reduced the purchasing power of both their interest and their capital at maturity.
2. Bonds are meant to be safe and secure without risk. While we know we can lose money in stocks, that is not supposed to happen to bond holders. This can and does happen if the price of a bond drops due to a rise in interest rates, inflation, or the issuance of more attractively priced newer bonds. Relatively few bond investors can avoid the need to sell their holdings before maturity and thus get the current market price rather than the maturity value.
3. There are some that believe that interest rates will rise. Martin Feldstein, the President Emeritus of the National Bureau of Economic Research, is one. He has said “It would not be surprising if the rate on ten-year Treasury bonds rises to 5% or more over the next few years with an inflation rate of 3%.” 
4. There is an expression that came out of German Hyper Inflation, which is “Watch out when the Banks start building”. For many years, on the way to the New York Stock Exchange I walked past One Wall Street, which was the headquarters for a bank that lost a proxy fight. The cornerstone had the date of 1930. Today we are greeted by the announcement that JP Morgan Chase has selected an architect to design its new Park Ave. headquarters tower.
5. Maybe bond fund investors are sensing their risk. For the last six weeks they have been net redeemers of their mutual funds.

Bottom Line
Recognize that things are seldom what they seem. Perhaps now is the time to review your holdings and update your investment process. We may be able to help. 



Did you miss my past few blogs? Click one of the links below to read.

https://mikelipper.blogspot.com/2018/10/we-are-in-training-exercise-weekly-blog.html

https://mikelipper.blogspot.com/2018/10/committing-reserves.html

https://mikelipper.blogspot.com/2018/10/learn-from-blame-game-weekly-blog-546.html



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Copyright © 2008 - 2018

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