New Era? - Weekly Blog # 944

 

Mike Lipper’s Monday Morning Musings

 

New Era?

 

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

 

          

Evidence

After an extended period of daily market movements below 1% per day, the most meaningful stock market index fell -2.64%, with the technology sector falling much more. The 30-company Philadelphia Semiconductor Index which produces the critical needs for “AIs” explosive growth fell -10.3%, while the NASDAQ Composite fell -4.18%. (This is not the first decline for a new technology driven bull market, which was led by railroads, canals, and undersea cables in 1873. These stocks traded on exchanges in America, London, and Vienna. In Vienna the market dropped 45% in one day.) Despite the happy talk from Washington and various pundits, we have seen continued notices of layoffs from large, seasoned companies, including by Macy and Saks. In New Jersey, April unemployment was 4.8% vs 4.3% nationally. (It was just announced that Exxon and Chevron have changed their state of incorporation from New Jersey to Texas.) What is more significant to me is the number of bank branches that are closing. Perhaps more significant is the observable factor that attractive, wealthy women, are not wearing expensive jewelry while shopping or at performances.

 

Midweek, the AAII sample survey showed the market outlook for the next six months being 36% bullish and 37% bearish. (I suspect that if the survey was done after Friday’s market, we would have seen a bigger total for the bears). Interestingly, some stocks that typically don’t attract tech buyers, like Coca Cola* (+3.46%), Moody’s* (0.49%), and even Apple*, fell less than the market (-1.25%).

*Owned in managed or personal accounts.

 

My View 

Most analysts and pundits compare stock price performance to past cycles to determine investment policies, much like telling time with a stopped clock. Seldom in an investment career does it pay to look for meaningful structural change. One way to do this is to recognize that old firmly held beliefs, like a flat earth, keep us from falling into the abyss. Like Columbus, we should seek to find new riches by going against the popular view, putting faith in a compass over an orderly world view. Similar to Columbus I may be wrong, but I will hopefully reward my backers with fabulous wealth by addressing society’s real problem, far too many unproductive people. Not only are the young unproductive, but there are also healthy seniors not working for money or the good of society.

 

Today’s government employment data shows that there are sufficient job openings for all the unemployed, although the hirers say they can’t find enough people to meet their needs. Only 61% of our population are employed. I translate that to mean they can’t find people with the correct attitudes and education to meet their needs. This is an indictment of both our schools and homelife. To solve this problem, they should automate wherever possible, which can mean using “AI”. 

 

 For many years I boarded a 6 AM train with papers to read, reaching the office at about 7 AM prepared for my first meeting with colleagues or committee members of the New York Society of Securities Analysts, the trade association of my profession. I was not alone, I would meet other analysts outside their offices for a bite of breakfast, where executive committee members were also having breakfast with their direct reports or others that were on the way up. (This was not the normal day that the executive committee officially met, but they were still doing business.) After a full day working numbers and writing reports, I caught the 6 PM train home. I arrived at close to 7 PM and then spent time with my children going over how they spent their day. Thus, my workday was 12 hours, with some additional time spent on the weekend. I probably spent some 70 hours a week fighting my way up the ladder.

 

The law calls for a 40-hour week, which does not include lunch. Today, according to the Department of Labor, the average American works a little more than 34 hours a week and that time probably includes lunch. If you listen to the young people of today, they believe in a work/life balance of at least 50/50. No wonder our productivity grows at around 3%, which appears to be higher than in China.

 

“Evidently, when Trump visited Xi Jinping last month, the Chinese president made a pointed reference to the concept of overstretch. A concept that was put forward over two millennia ago by the ancient historian and general, Thucydides. Can China and the US overcome this trap? There is also the risk of war expenditures becoming greater than the rest of the economy. The current administration, unlike China, is extremely focused on short-term-announcements impacting the mid-terms. Strategically however, both the President and Xi Jinping are aware of the seminal work by Rear Admiral Alfred Thayer Mahon, titled The Influence of Sea Power Upon History.

 

See what you can do to increase productivity and put more of us to work for society. Your help is needed.

                                         

 

 

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

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

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

 

 

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Rarely Found Different Thoughts - Blog # 757

 

Mike Lipper’s Monday Morning Musings

 

Rarely Found Different Thoughts

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

            

 

 

Unexamined thoughts can contain time-bombs antithetical to generally accepted views. Good professional scouts (analysts/portfolio managers) should review as many unexamined thoughts as possible to find comfort in their present views, or look for possible reasons to change them.

The closer you focus on media designed for mass audiences the smaller the focus on detail. This results in more emotional and decisive views. The conclusions might end up being correct, but the historical odds of being right are substantially below half.

A good example is the reported percentage gain from the June lows for the 3 popular stock market averages. Most of the media, with their limited space and time, tend to focus on the results of the 30 stock Dow Jones Industrial Average (DJIA). You get a distinct happy view that this senior index is up +14.40% from its low point, which is in the mid-range for rallies after a sizable decline.

A much larger sample found in the S&P 500 index, weighted not by price but by market capitalization, has gained +9.05%. This is a more normal sized bounce, not the large gain seen in the DJIA. Considering this index is experiencing a period of increased volatility and is only up 353.44 points, it seems more like a rally in a traditional “bear market”.

Tech-oriented stocks led global markets both in the last expansion and during the most recent decline. There were some notable near-term declines in earnings and or future guidance, yet their prices increased +6.58% as measured by the NASDAQ Composite. The sectors that go down most in a short-term market rally often lead on the upside too. No so now!!

The problem facing the world in terms of chatter by politicians and pundits is inflation. People don’t understand that inflation is a price adjustment mechanism to equate the value of goods and services to the currency at hand. Inflation is a measure, not the cause. It is created by perceived shortages, not excess demand. The shortages are partially caused by the declining productivity of human and financial capital.

The collective failure to address these causes suggests one should take a bearish attitude in anticipation of a probable recession. The real fear is that without addressing the real problems we will experience future deeper recessions, stagnation, or worse for capital owners, stagflation.

How do you see it?

 

 

 

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

Mike Lipper's Blog: Fundamental Changes Occurring - Weekly Blog # 755

Mike Lipper's Blog: Are We There Yet - Weekly Blog # 754

 

 

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Are We in Boiling Water? And Understanding Value - Weekly Blog # 650

 

Mike Lipper’s Monday Morning Musings

Are We in Boiling Water?  And Understanding Value

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

Where are we (in the market)? Many of us have traveled with impatient children that too frequently ask “are we there yet?” What they should be asking is, where are we and what difference does it make? Plenty. This is where a frog and a pot of water is useful. Placing the frog in a pot of cold water will be greeted by the frog jumping out. Place the frog in mildly heated water that is a comfortable temperature and the frog stays put. If you raise the temperature slowly the frog is not conscious of the slowly rising temperature until it reaches a boiling level, which kills the unfortunate frog.

In terms of the current US stock market expansion measured by the popular indices, is the temperature rising? There is some evidence from the last four weeks that we should be getting ready to jump out of the market indices led market. Over the past four weeks ended October 8th, the average S&P 500 Index fund gained +3.31%. This compares to gains of +4.35% for the average Large-Cap Growth Fund and +5.60% for the average US Diversified Equity Fund, comprised of 7,336 funds. Earlier in 2020 index funds were clearly in the lead, for three reasons:

1. They were fully invested and thus had no retarding cash
2. They had no brokerage and other operating expenses
3. They had a large commitment to information technology stocks

What is causing the change waking up us frogs? Both brokers and the media need investors to transact to meet their commercial needs. Considering that in the current year we had a record decline and recovery in terms of annual rates of change. As this is unusual, it generates nervousness. In September the shrillness of the political campaigns upset some investors, causing them to question whether their current investments will serve them well in the next couple of years. 

Turning to specific concerns, the final publication of the majority report from a House Committee advocated for a new type of anti-trust legislation that would splinter large info-tech corporations. Evidence of these concerns can be found in the short positions of the tech heavy NASDAQ market, which rose 3%. This compares to the short positions on the NYSE, which rose only 0.5 %. Volatility has risen over the last three weeks compared to levels a year ago. The performance of the NASDAQ Composite has led the Dow Jones Industrial Average (DJIA) and the S&P 500 for some time, but it is no longer the clear leader.

Getting Ready to Jump to “Value” Stocks

Advocates of change are reducing exposure to tech in favor of adding to “value”. As with many labels, it covers a wide range of different types of actions and securities and could well be jumping from the “frying pan into the fire”. In terms of the professional academic literature, the earliest text I know about was titled “Security Analysis” by Benjamin Graham and David Dodd, who were professors at Columbia University during the Depression. The book was so successful in academic circles that it went through five editions. I was extremely lucky, as I took David Dodd’s Security Analysis course toward the end of his distinguished career. 

In reading his text in class, it became clear that he was describing value as liquidating value. This was a very good way to make respectable investment returns starting in the depression. Remember, this approach was that of an academic, not a business person, so there was reliance on published financial statements. As students, our first task was to recast the balance sheet by revaluing the assets and liabilities. The critical key to the analysis was to value the preferred shares and debt at their current market value, not their stated value on the balance sheet. Furthermore, assets were revalued to what they could bring in a quick sale. This meant that only finished product inventory had any real value and that was subjected to a discount. Plant and equipment were assigned little to no value. The next step was to augment the balance sheet with undisclosed assets and liabilities, including items such as leases, rights-of-way, and the net value of pensions. This type of analysis led to the conclusion that some bankrupt companies could be worth more than the lackluster common stock price. This type of analysis allowed Graham and Dodd to buy and liquidate companies in their fund.

Max Heine, founder of Mutual Shares, and Ruth Axe, founder with her husband of the Axe Houghton funds, did similar operations of railroads. Axe Houghton at one point controlled the Missouri Pacific Railroad by being the dominant holder of a cumulative preferred issue, which had not been paid dividends for many years and had to be paid off before the railroad could be sold with its attractive right-of-way real estate assets. (In a similar way, as a small investor I participated in a defaulted cumulative preferred, which over time was gaining voter control of the board of Pittsburgh Steel.) The key point of this deeper understanding of “Value” is that one does not rely on published balance sheets, but uses them as a beginning to find other assets and liabilities to recast a more realistic picture.

“History Does Not Repeat Itself, But It Does Rhyme”

In some respects the search for attractive value investments may be similar to the period of Graham & Dodd’s depression analysis, at least in questioning book value as shown on published balance sheets. There have been many accounting rules changes, but a few things remain the same. In most cases land is carried at cost and buildings and equipment are carried at depreciated value. While at this point in our recovery I don’t know what the future will bring from the pandemic, my working assumption is that WFH (work from home) will reduce the number of people in office buildings and will likely impact the value of the buildings. There may also be less value in being in major cities. (I do recognize that some of these properties may be successfully repurposed, usually by private real estate people.) We have already seen a remarkable shift in the use of equipment to produce masks and similar products. Nevertheless, I question whether that will be the case in the new era.

This Week Brought an Example of a New Right of Way Deal.

The Missouri Pacific example of using the right of way real estate value to generate a higher than current market price still works today, but in a different form. This week, Morgan Stanley announced they will acquire Eaton Vance with a combination of stock and cash, at a 40% premium to the price it was selling prior to the surprise announcement. In some respects it was similar to depression type value creation. Eaton Vance is one of the oldest mutual fund management companies, starting life as the principal underwriter for the first publicly traded mutual fund, Massachusetts Investment Trust. It later started its own funds and through a Boston merger entered the investment counsel business. Over the years it raised money through sales to various brokerage firms and investment advisers. In recent years, it was successful in developing imaginative fixed income funds and low-cost index portfolio products. 

These distribution relationships were not on their balance sheet, but was what Morgan Stanley found attractive. (Morgan Stanley itself is the largest brokerage firm using Eaton’s funds.) Morgan Stanley found that 95% of Eaton Vance’s sales were to US and Canadian clients. They were under distributed internationally, which is where Morgan Stanley has considerable strength. There is another element that makes this merger attractive to the acquiree. The CEO of Morgan Stanley publicly announced that he was wrong to have sold Van Kampen, another fund management company with a strong distribution organization. Morgan Stanley also sharply curtailed its capital absorbing fixed income trading a few years ago.  They will be using a limited amount of its accumulated capital for this deal. All companies make mistakes, but few admit to them. I believe a former “sinner” is more likely to be a good partner in the future.

There are a couple of additional personal pluses to this deal. In the development of my own firm, when we generated sufficient capital beyond our operating needs we began investing in our clients. The main purpose was to avail ourselves of a shareholders’ view of our clients. In 1981 I purchased some shares in Eaton Vance for the firm. Luckily, when Reuters acquired our assets in 1998 they did not want our small portfolio, as they did not see the intelligence value of the holdings. Thus, today we are the pleased owners of a few shares that cost under 9 cents a share due to splits. (To demonstrate that it is better to be lucky than smart, over the years we have sold some of these shares for other portfolio operations.) As a member of a number of investment committees, I believe long term ownership of reasonably diversified portfolios of common stocks to be very capital productive over a long period of time.

Concluding Thoughts

We may or may not be at a pivot point in the stock market. If not, it is only a matter of time before performance leadership changes. At that point, some of the leadership will be labeled value. However, I believe future success in terms of stock prices will not be based on published book value. Attractiveness will be the result of finding unrecognized assets and ways to reduce liabilities. So, Professor Dodd will once again be correct.  

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https://mikelipper.blogspot.com/2020/10/what-is-nasdaq-saying-to-whom-weekly.html

https://mikelipper.blogspot.com/2020/09/there-is-incredible-shortage-weekly.html

https://mikelipper.blogspot.com/2020/09/headlines-excite-dictate-or-respond-not.html

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What is the NASDAQ Saying to Whom? - Weekly Blog # 649

 

Mike Lipper’s Monday Morning Musings

What is the NASDAQ Saying to Whom?

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

Prior to Friday, the performance of the NASDAQ Composite Index led all other stock price indices in performance, and in my opinion, was an indicator of the future direction of the more diversified market.

Then on Friday we experienced an October surprise. The President of the US, the most prominent media political personality in the world, was diagnosed as having contracted COVID-19. An “October Surprise” has been a feature of American presidential politics and some believe it changed enough votes to swing elections. One should remember that voters do not take a verified test as to why they voted the way they did at the time of voting. There is some evidence that voters tell pollsters what they believe they want to hear, or who they think will win. Thus, there is no verifiable way to know how any specific individual voted, or why.

Most people responsible for the ownership of common stocks are long-term investors, and although they participate in the parlor game of expressing their view that it motivates their voting, it does not. Thus, the movement of stock prices or indices is not guaranteed to be predictive of voting results.

NASDAQ Against the World

Trading began on Friday after the announcement of the President’s medical condition, sending stock prices down by more than 400 Dow Jones Industrial Average (DJIA) points. Sharply fallen prices brought buyers into the market and by the end of the day the DJIA was down only -0.48%. What alerted me to something potentially signaling a major change was the NASDAQ falling -2.2%. Since reaching their all-time high on September 2nd, the S&P 500 and NASDAQ have been falling. (Remember my warning that due to changes in composition and weighting the DJIA is likely to be less reliable due to its greater tech orientation.) Until some time passes, the S&P 500 will be a more useful than the dollar weighted market indicator. By Friday’s close, the S&P 500 had dropped -6.49% for the month since achieving its high point. Over the same period the NASDAQ fell -8.14%, the difference being Friday’s price movement. Thus, Friday’s bigger decline could be significant.

What Did NASDAQ’s Friday Bigger Drop Signify?

The NASDAQ index is labeled “tech-heavy” and consequently the performance of tech stocks is disproportionately important to its investors. The only two mutual fund investment category averages gaining over 30% through the Thursday year to date period were Precious Metals +35.68% and Global Science & Tech +35.27%. (Five other investment categories were up in excess +20%) 

Someone with an eye on the political statements made by the leading candidates, and more significantly by some other political leaders concerning the large Tech companies, might ponder the implications of Friday’s tech stock price movement. The popular view is that the Democrats would like to see the economic marketing power of the leading tech companies restricted. Is that the reason the “tech heavy” NASDAQ Composite Index declined materially on Friday? (Prior to Friday, the NASDAQ’s decline from its peak was right in line with the fall of S&P 500.) What makes this view curious is that most CEOs of Tech companies are major Democrat supporters. (It is not unusual for successful candidates, upon being elected, to turn on their supporters and attempt to broaden their mandate.)

Changes in Marketplace Structure Could Be More Important Than NASDAQ Price Movements

While most investors only pay attention to the movement of the prices of their stocks, I also focus on the “inside baseball”. Who is executing and initiating the orders and how their marketing efforts are influencing what we think about their investments. It is interesting that there is rising concern over the marketing power of major tech companies, while there seems to be a parallel concern in the investment marketplace. Recently, it was noted that the five largest asset managers, in aggregate, manage more dollars than attributed to the US GDP. Even greater concentration was indicated by two announcements this week.

Wilshire Associates, a data supplier and asset manager, was sold to two private equity managers willing to provide more capital to expand Wilshire’s business. Also this week, Trian Fund Management announced that they have taken a 9.9% position in both Invesco and Janus Henderson, and announced that there should be greater merger & acquisition activity in the investment management business. These smart people were successful with their investment in Legg Mason, generating a gain of 55% for them. This area is of great interest to me, as I manage a private fund invested in Financial Services stocks.

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

https://mikelipper.blogspot.com/2020/09/there-is-incredible-shortage-weekly.html

https://mikelipper.blogspot.com/2020/09/headlines-excite-dictate-or-respond-not.html

https://mikelipper.blogspot.com/2020/09/mike-lippers-monday-morning-musings-who.html

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Caution Ahead: Emotional Turns Likely - Elections and Coronavirus - Weekly Blog # 644

 

Mike Lipper’s Monday Morning Musings

Caution Ahead:

Emotional Turns Likely-Elections and Coronavirus

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

When the battlefield is quiet, expect to be attacked, is a lesson from the US Marine Corps. For bullish equity investors the low volume of August trading should signal a need to expect change. The most dangerous short-term change is one spurred on by emotions, rapidly bringing into action holders of excess cash or large equity holdings.

The calendar provides two events that could quickly galvanize emotional responses, the forthcoming US election and reports of successful vaccines/therapeutic COVID-19 treatments. Both could mobilize a large amount of almost instant trading from thrilled and disappointed investors. Based on a lifelong study of turning points, I suggest caution on the part of investors who believe in rusty or non-existent trading skills. Furthermore, very soon after the announcement a counter trend could appear, reducing the size of the initial pop and in some cases completely reversing it. As more information becomes available, the implications of the announced event will often become clearer. Even if further information reinforces the initial announcement, the length of time varies before complete utilization becomes evident. Thus, investors will have time to calmly adjust their holdings. 

Profitable courses of action build on some factors present before the headline event, while others will have little to no future impact. Some will advise you of the critical present factors supporting the future event, I am not so privileged. All I can do is briefly list some of the factors that might support the trends post the announcement, including the subsequent reversal moves:

• The biggest investment news of the week was the changing of the components of the Dow Jones Industrial Average (DJIA) and the reweighting of Apple*. The current producer of this most senior of US stock indices is S&P Indices, owned by Standard & Poor’s, who consults with some of the editors of The Wall Street Journal when making changes. On Monday they will delete Exxon Mobil, Pfizer, and Raytheon Technology, adding Sales Force, AMGEN, and Honeywell. In addition, on the same day the weight of Apple in the index will be reduced due to Apple’s four for one stock split. It will be replaced as the company with the heaviest weight in the index by United Health.

Because of the dominance of Dow Jones through its wires and publications, most investors tend to believe that the DJIA measures the US stock market. That a thirty-stock market price weighted index is “the market” with its’ 30 stocks and not the S&P 500, the Russell 3000 or the Wilshire, with its original 5000 stocks, shows the power of the media. Clearly, global indices have even more components. Nevertheless, the DJIA has done a reasonable job of tracking high-priced US stocks. Part of its success is due to dropping components when their outlook appears to be slowing. (Some components comeback into the index after a large merger.)

While most market followers will continue to use the DJIA as a market measure, I will not for the next twelve months. While statisticians will link the new components and the reduced weight of Apple, I believe they have created a new measure. After one year I will see the level of correlation with the S&P 500 and if the gap is close, I will return to using it as a measure. Once again, the editors may have done a good job of changing the components to represent our economy. Over the more than one hundred years of its existence, they have done a good job of switching the emphasis from consumer products, to industrials, to tech and then to high-tech.

(*) Owned in personal accounts

• Record high prices achieved this week for both the S&P 500 and the NASDAQ Composite confirms the view that the American Association of Individual Investors (AAII) sample survey of market direction for the next six months is a contrarian  indicator. For the first time in many weeks the leading bearish prediction fell below an extreme reading of 40%. 
• 79% of the WSJ’s weekly prices rose. This may reflect some shortages, but it also reflects merchants trying to increase prices to make up for forgone profits. Despite many learned economists being quite sanguine on inflation, I expect the Fed to get and exceed its desired 2% inflation target.
• Unfortunately, I expect layoffs will rise for a while. The Russell 2000’s second quarter estimated revenues dropped -19%, with earnings dropping -99.1 %. This indicates to me that smaller companies have kept their staffs to preserve their hard to get employees. So far, third quarter revenues have not risen much. There is a good chance that instead of preserving the work force the focus will shift to preserving the firm. I suspect private firm closings indicate a similar trend.
• The bond market is moving contrary to the stock market. Of thirty-one fixed income mutual funds investment objectives, only twelve gained for the week and they were equity tinged high-yield or pro inflation vehicles. The maturity yield curve tightened, with maturities of more than two years rising.
• There may be more longevity to the current market than appears. Typically, markets don’t peak until they exhaust all available cash and there is a lot of cash on the sidelines today. In addition, there is a lot of capacity to increase margin borrowing.  Remember, margin can be used to support short sales, as well as the more popular long purchases.

Working Conclusions:

• Trading oriented accounts should be prepared to make lots of small moves and be willing to reverse direction when appropriate.
• Capital appreciation accounts should look for bargains by being contrary.
• Capital preservation accounts need to recast their portfolio in one or more other currencies to determine their risk of only evaluating their accounts in dollars. European investments may look attractive for “value” oriented accounts and Asian investments could be attractive for long-term growth investors. Multi-generational investors should develop an understanding of the long-term outlook for selected investments in Africa and the Middle East.

Share your reactions and thoughts with us. 

     

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https://mikelipper.blogspot.com/2020/08/mike-lippers-monday-morning-musings_23.html

https://mikelipper.blogspot.com/2020/08/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/08/rotating-leadership-likely-on-horizon.html

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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



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Copyright © 2008 - 2018

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

Short and Long-Term Opportunities with Risks - Weekly Blog # 593

Mike Lipper’s Monday Morning Musings

Short and Long-Term Opportunities with Risks

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

Mid-course corrections and structural changes represent both opportunities and risks. Opportunities and risks are rarely separate from each other. My process for dealing with each, travel along similar routes:

• Early, but not too early recognition. (Statistically there is not much difference from a discovery that’s too early and being labeled wrong)
• Identify the magnitude (Large to life-changing vs. time and reputation risk, which can’t be recovered)
• A research plan to narrow the number of opportunities and risks. (We can’t deal with too many variables)
• An initial plan of action (Casualty lists are full of those who were too motionless)
• Frequent adjustments to the plan. (Frequent but not too frequent, there is time needed for others to react reasonably)
• Listen to both extreme historians and futurists. (They are often the same)
• Create short-term achievable goals. (A passing grade is better than 100%, from which you can’t learn)
• Cut the losses when other opportunities appear with lower risks. (Most great discoveries/inventions are bi-products of research efforts seeking other solutions)

Subscribers could use the above principles in reviewing what comes next.

Mid-course Correction?
US stock prices since late July have violently fluctuated in a trading range, as measured by the three major stock indices.  At the lowest point they were about half-way to a normal 10% correction. As of Friday, they were within a good trading week to their former peaks, achieved in July: Dow Jones Industrial Average -2.05%, S&P 500 -1.56%, and NASDAQ Composite -2.73%. This blog is prepared for long-term investors and I am therefore not going to focus on the momentum driven traders that dominate the market these days, especially when long-term investors are nervously enjoying gains generated over the last ten years.

While the market and economies are not driven by the calendar, investors and the media tend to focus on annual returns. I am concerned that while most stock and equity fund investors have not yet reached a gain of 20% year to date, a large number have. I am wondering whether the market indices will go through their old highs with some enthusiasm, or whether they will be stuck in a price range with high volume, encouraging some equity investors to take some chips off the table and wait for the clarity they expect in November of 2020.

This is not a political judgement; one expects to see some damage from low interest rates and falling currencies. These investors should remain equity investors in stocks and funds, perhaps with some rearrangement of their choices. However, under no circumstances should they have less than 50% invested in the stock market, re-entry costs and tensions are high for taxable investors.

Fundamental Changes for Long-Term Investors
There are two very important changes that are likely to impact successful investing in the future:

• The appropriate nature of invested capital
• Fewer workers and more mouths to feed 

Adapting to the Changing Nature of Capital and Investing
The earliest identified capital included physical things like land, jewels, and weapons, etc. One could see them, and an experienced person could evaluate their worth. Thus, the earliest recorded loans were mortgages or collateral. The wonders of double entry accounting recognized an assets value as the residual of its depreciated cost. Thus, the earliest investors concentrated on collections of assets, which led to analyzing balance sheets. This may well be appropriate in a world where the physical reality of assets is well understood, but that is not the reality today and increasingly it will be less so in years to come. Over one hundred years ago JP Morgan, himself that as a banker, made loans based on a person’s character, not their collateral. Nevertheless, today we still group companies in terms of their manufactured products, while our politicians focus on manufacturing jobs and their related products.

The service sector has been more productive in the production of wealth than the manufacturing sector for some time. Matter of fact, most successful manufacturers are also good at providing service and arranging financing for their customers and themselves. I would certainly include salespeople as being service workers, both within and outside every business today. We have entered a low interest era which appears to limit profitability.  Some wonderful old companies having more physical constraints are producing well respected brands but have suffered sales and other problems leading to significant layoffs. Some of these workers will retire or leave the industry, others will go to competitors in much smaller and more specialized elements of their industry. I see this occurring in older tech, pharmaceutical, and financial companies.

For many years CEO’s have thanked their most important asset, their employees, in their annual report letter. Since recruitment has become an important responsibility of senior management, critical employees are identified as “talent”. To those who think about these things it creates a dilemma. Do we as customers continue to rely on highly respected brands, or do we seek out products and services from which organizations are supposedly attracting the best talent? We face the same question as investors, especially the choice of colleges for those with children and/or grandchildren.

As an investment manager using financial services stocks and diversified mutual funds from around the world, I deal with this problem daily. A good long-term investment in these arenas needs good portfolio managers, salespeople, and good administrators. It also needs top management who wishes to have these people and can manage them, which is not easy. The problem today is dealing with the layoffs. The Financial Times noted that trading and advisory revenues dropped 11% in the first half of 2019 for the 12 largest investment banks in the US and Europe. We have seen most of these businesses shedding people, many of which were servicing and supporting the investment and wealth management efforts, both for their own companies and external clients. The people I know are looking because they have been laid off, or because they see significant elements of decay in their shops and want a better home to practice their art. With these people I could produce the best investment team in the world, but it unfortunately won’t happen because these people aren’t capable of working well together.

I am currently focusing on a small number of turnarounds which have similar characteristics. In the past they’ve had some good performing mutual funds, good sales teams, and good administration that was largely done in house. What makes these potential turnarounds interesting is that they have retired their old management. They now have new management that is busy trying to hire the right people to run critical parts of their organization. While the companies I am looking at are publicly traded, the new top management is long-term focused and not looking to the next earnings report. Not all of them will succeed, perhaps none will. But if they don’t succeed in a reasonable time, they’ll not be able to attract the needed talent and will be forced to merge to save a limited number of jobs. Often the acquirers are not much better than the acquired, just richer. Some will be successfully turned around if they can benefit from what I see and show next.

Retirement is Necessary for Our Success in the Future
Barron’s had a cover story this week “How to Fix the Global Retirement Crisis”. It points out that in 2050 there will be more people over 65 than under in the US. Japan has already reached having 59% over 65, in the US we are at 38%.  I would suggest we need to find ways to keep able and willing people working. At the same time, we need to find humane ways to free up some of their jobs for younger workers who can do more with those jobs. Most of the time seniors are healthy and want to be active mentally and physically, if they have the financial resources to do so.

In some respects, the mutual fund industry is one of the luckiest of all industries. A substantial portion of its growth has come from external forces, usually the government looking after senior voters. In the US the federal government passed legislation which created individual retirement accounts, salary savings accounts (401k, 403b, and 457 plans), tax exempt mutual funds, and money market funds. Without these the fund industry would have been much smaller. Things are similar in other countries, but they’ve used different measures to aid their own fund industry. The leader is Australia, which mandates that 9.5% be contributed to superannuation funds, a number that is expected to rise to 12% in the future. If one combines that with a history of no recession for 28 years, future retirees can look to a sustainable retirement. Considering seniors vote more often than other age groups, one would think that the US government might address their needs.  This could even cause the interest rate of savings to rise to a level that would reduce future unemployment through sounder loans.

Investment Suggestions

1. Use the present market to clean up your portfolio of losers that are unlikely to soon return your cost.     
2. Focus new investments on companies attracting good talent.
3. Restrict brand buying to your consumer needs, not investments.
4. Be prepared for opportunities and problems.    

Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/09/excess-capital-less-equity.html

https://mikelipper.blogspot.com/2019/08/an-awkward-moment-with-frustration-not.html

https://mikelipper.blogspot.com/2019/08/short-term-recognitions-plus-longer.html



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Copyright © 2008 - 2019
A. Michael Lipper, CFA

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Contact author for limited redistribution permission.

Not Yet a Peak & Luck Lessons - Weekly Blog # 572

Mike Lipper’s Monday Morning Musings

Not Yet a Peak & Luck Lessons

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

       

Absolute price tops and bottoms rarely occur. Most of the time market prices fluctuate without creating important turning points. Comments about investment markets are mainly focused on earnings and related valuations and these have not recently been helpful as guides to making investment decisions. In their place some are relying on various statistical measures of investors’ sentiments and the current somewhat bullish indicators are not generating a lot of enthusiasm. There is something absent from the picture. The stock market has been moving up for three and half months, but the volume on the New York Stock Exchange in 2019 is down -4.68%. An even better measure of short-term speculation, the NASDAQ composite, is up + 1.31%. Some short-term traders may be concerned that in March the three major stock indices had a gap in their price charts. Many market analysts believe that gaps need to be filled before a price trend can be relied upon. While no forecasting measure is ever 100% accurate all the time, I believe we have not yet reached a peak level.

Sports World Experience

One should pay attention to the importance of luck, especially in light of Tiger Woods winning “The Masters” golf championship this weekend. A remarkable comeback for him considering his physical and personal problems. Not taking anything away from the winner, but a couple of golfers that were ahead of him ran into some poor luck with a few of their strokes. In my basic investment analysis course at the racetrack I would call this “racing luck”. To me the most useful analytical time at the track is the twenty to thirty-minute period between races. This is the time during which I compare the results of the prior race against those predicted by my handicapping analysis. Most often, with the benefit of hindsight, one can find in the records of past races the reason the results turned out as they did. In the minority of instances, when the results could not have been predicted, it was the result of the record being incomplete or the result of unanticipated “racing luck”.

My Lucky Experiences

I have had two experiences that had nothing to do with my securities analysis training and certainly was not tested in my CFA exams. I would call these examples of racing luck.  

• As a result of following closed-end funds I owned a few shares of an Eaton Vance fund who had a relationship with Winrock, the venture capital arm of the Rockefellers. They had a share interest in some of their holdings and for regulatory reasons needed to terminate it, resulting in the closed-end fund distributing ownership of those shares to its shareholders. Consequently, I own a few shares of Apple at under $1 apiece. (At some point in the distant past I sold half the position because I had enough losses in other securities to offset the large gain in Apple. VERY DUMB MOVE to let taxes dictate an investment decision, an important lesson.)

• Many years ago I took out a life insurance policy and later realized that unless I passed prematurely it was a bad use of money. The rate of return the insurance company needed to meet its obligation was low relative to what it was earning on its investments. Thus, I bought some shares in the insurance company to take advantage of the spread and the float in the investment account. As a result, I would have a sales force working for me to find others that did not fully understand the economics of insurance. This is a lessoned not taught at Columbia. Over the years the insurance company did well but was never a high-flying stock. Recently it was bought out for cash and stock, the cash being many multiplies of my cost. Thus, I am more than satisfied. The stock is CVS Health, which I currently hold. I don’t generally directly invest in the health care industry, but let my choice of specialty and diversified mutual funds give me exposure. Barron’s recently had a cover story titled “CVS This could be the future of healthcare. Time to Buy”.  According to the article it is selling at an 8 P/E and a yield of 3.79%, which is in the range of the insurance stock I bought years ago.

Lessons

1. As indicated, don’t let taxes alone drive investment decisions. Sell when there is a better use for the money.
2. One needs to be invested to allow good luck to happen to one’s money. If I had to buy them independently, I probably would not have owned these winners.
3. Over long periods of time, investing in a portfolio of equities works better than trying to time the market
4. Cash reserves are appropriate to meet expected payments and for use as a possible opportunity reserve.

Questions of the Week:

1. What is the range of your opportunity reserve?
2. How long should you keep the reserve if you can’t find a commitment?

  

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

https://mikelipper.blogspot.com/2019/04/investing-in-quality-for-growth-or.html

https://mikelipper.blogspot.com/2019/03/investment-committee-and-investors-be.html

https://mikelipper.blogspot.com/2019/03/the-actively-worrying-classpassively.html

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Copyright © 2008 - 2018

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.

Investment Committee/Investors Prepare for Mistakes - Weekly Blog # 570

Mike Lipper’s Monday Morning Musings

Investment Committee/Investors Prepare for Mistakes

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

     
                               

Bright People Are Sometimes Wrong

I have assembled and often chaired investment committees of bright, experienced investors. I have been curious as to why these bright investors make unexpectedly bad judgements. Individually, they have a history of making good choices in terms of securities and the timing of their transactions. I bring this up as we approach a general market turning point. I am totally convinced that we will see record high prices for the major indices and I also have confidence that we will experience both recessions and substantial market declines. The order, timing, and magnitude of these are unclear to me. What I am sure of is that many investment committees and most investors will get their timing absolutely wrong!!!.

Why?

We are social people who mostly prefer to agree with others than to express a strident minority view. The group dynamic in most investment committees is to move to a unanimous decision. Unless we have very deep-seated opinions there is a tendency to go along with the sensed majority view, despite our own private opinion which may be better. This tendency has been labeled the “Abilene Paradox”. I suspect that this is one of the reasons that political pools have proven to be inaccurate. One can often sense the answer the questioner wants to hear and we have sympathy for those who ask.

Current Factors

Double digit gains were achieved by the major stock market indices despite the global slowing of economies. The gains if repeated would result in record price levels, led quiet possibly by the NASDAQ Composite, the most volatile of the major stock indices. This volatility could be driven by the larger tech companies or less capital being committed to over-the-counter market making.

The latest Atlanta Fed Real GDP fan chart estimate ranges from under 2.5% to under 1%, reflecting market fears.

China appears to be the most important driver of global economic growth. Some believe changes in Chinese policies are having a bigger impact than the Fed. In part this is true because interest rates driven by the Fed are currently in the mid-range. They have not gone high enough to attract savings (4%) or low enough to spur a declining economy.

One large fund of funds manager has re-juggled its list of managers in favor of concentrated “high-conviction” managers. Others are adding leverage to their portfolios to overcome low returns. From a market viewpoint the combination of leverage + volatility = dynamite.

Helpful Hints from Mutual Funds

Mutual funds are now required to show their best and worst quarters. These are often next to or close to each other. Often the magnitude of the gains and losses when linked together almost cancel each other out, although sometimes it may take two up quarters to recover the losses from the bad quarter. If the percentage gains and losses are large, it is an indicator that the fund is volatile.

The coverage of mutual funds can be misleading, as media and sales efforts focus almost exclusively on the best performers in relatively short time periods. The leaders and laggards are often highly concentrated in terms of the number of issues held, giving the impression that these mutual funds are bought for speculation, although that is not always the case.  

The vast majority of the equity funds are in just four investment objective categories and are listed below in descending order of assets, which also appears to be at increasing levels of perceived risks as you work your way down the list: 

Growth & Income    $4.27 Billion  

Growth              3.84                 

International       2.48                 

S&P Index           2.19                 

The first three investment objectives carry cash to meet extreme redemption needs and opportunity reserves. The biggest use for these funds is to meet retirement and for estate building purposes. Most redemptions are caused by life changes. Index funds always have no cash and buy the most popular stocks.

Turning Point Reactions Produce Relatively Small Gains and Large Losses

Historically, momentum becomes the enemy of capital preservation when we near peaks and troughs, unless an investor possesses trading skill. Investment committees at this juncture become captives of the “Abilene Paradox”.

Don’t say that you weren’t warned, but good luck and stick to your convictions.

  

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

https://mikelipper.blogspot.com/2019/03/the-actively-worrying-classpassively.html

https://mikelipper.blogspot.com/2019/03/long-term-trends-may-not-be-friend.html

https://mikelipper.blogspot.com/2019/03/the-top-before-big-top-weekly-blog-567.html

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Copyright © 2008 - 2018

A. Michael Lipper, CFA

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Emotional Preparations for the Next Markets Using Top/Down and Bottom/Up Thinking

Introduction

To some degree we are similar to a group like teenagers enjoying our first kiss. This communication skill has set us up to be exposed to other kisses. Turning to our social, political, and investment lives we are regularly being planted with kisses. Unfortunately those kisses are from those who wish us to part with our approval, votes and money. As they besiege us with kisses as translated from their sales training exercises “Keeping It Simple Stupid” (KISS).

I am particularly turned off by oversimplified presentations or sound bites by various sales types, be they be politicians, salespeople, and especially client portfolio managers and other types from wealth management organizations. It is normally a mistake to interrupt them as they have to go back to their opening line and repeat their pitch. Don’t ask too many detailed questions. By the time one gets to the third level of questions or cross examinations they are out of their depths. The good ones will stop there and change the subject to more familiar topics. The others will guess which “solutions” can be amusing but have little lasting value. Nevertheless, these presenters do have worthwhile value. They are excellent at summarization and generating memorable quotes.

Before I select a mutual fund for my clients I need to spend time with the fund's primary portfolio manager. I ask lots of questions, some they may have not addressed before. The purpose of the exercise is to assure me that the portfolio manager, perhaps aided by analysts, knows more than I do and has some different views than I do. I buy funds when it is clear to me that they bring materially added value. Often these portfolio managers are not as memorable or glib compared with their professional presenters. I still remember spending close to two hours with a well performing fund manager peppering him with lots of questions. At the end of the time allotted I looked at my list of questions and did not have any answers to my questions. What was clear: I did not understand him well enough other than to appreciate his good record. Subsequently when as all good managers do, he had some less than stellar performance, he left the large fund group with a couple of accounts as it became clear that the group was only interested in good performance not the reasons for it. It took many years for me to return to this particular shop. On return the new group of portfolio managers were good communicators of their bottoms up  analysis.

The Necessary Three Inputs

One of the better market analysts that I know is asking his clients to be emotionally ready and to be prepared to act in the future when the markets become much more cyclical with major changes of direction.

In order to prepare for these changes I believe a good investor will need three inputs. The first is understanding the “big picture” scenarios of the top/downers. The second are the contrary indications from the bottom/uppers. The third is an individual risk management levels for different components of one’s entire investment and career portfolio. In this stew one will need to be judicious in what one eats and when, without the tempting need to consume all that is “on offer.”

Top/Down Stock Market Views

Charles Schwab’s team is expecting a pull back from current levels. This is overdue in that the S&P500 has not had a 5% decline in over a year. The only strategy in using elements in the “500” to decline in the second quarter was the S&P500 High Beta sub index. It was the second highest performer in the twelve months through June which clearly demonstrates the rotational or cyclical nature of the market. The level of enthusiasm does not yet fulfill a prerequisite for a major top; the American Association of Individual Investors' (AAII) consensus in its weekly survey had a bullish jump to 35.5% from 28.2% the prior week and a bearish count of 25.8% from 29.6%. Clearly most participants have a neutral view. This and other sentiment indicators are worth watching at least as coincident measures and when they go to extremes as contradictory signals.

Bottom Up Inputs

Contrary to popular views of many of the various pundits, mutual funds are beating “the market.” Each week my old firm, now known as Lipper Inc., an affiliate of Thomson Reuters, tracks fund performances of mutual funds around the world. For investors in SEC registered funds, it divides its list into various investment objectives. In the latest week it is tracking 69 equity oriented fund objectives. For the year to date period ending Thursday the average performance in each equity oriented fund investment objective was better than the performance of the average S&P500 fund in 39 investment objectives or 56% of the universe.

In the US Diversified Equity (USDE) group there were five better performing objectives, four were growth funds of various market capitalization levels. There were 9 sector objective winners, in addition  25  of out 26 world equity fund objectives were also winners.

The latter is not surprising as fund investors and their advisors have been buying non domestic funds for over a year while their older and more long-term fund holders were completing their USDE voyages to meet educational, retirement and estate needs. What is interesting and historically surprising is in the same year to date period there are 27 fixed income investment objectives with fluctuating net asset values. Every one of these averages were positive. One of these, the Emerging Market Local Currency average (with a gain of 11.45%) did barely beat out the S&P500 gain of 11.39%.  Often when stocks go up, bond and other fixed income securities decline in price.

An Important Breakout Despite Clues of a So-Called “Likely” Pullback

Some of the leading technical market analysts are pointing to the fact that both the S&P500 and the NASDAQ Composite have twice broken out on the upside with gaps. These are usually filled in before there is an extended move. This is underpinning to the belief that a pull back is likely.

A reversal to the reversal may be imminent. In the backing and filling of the NASDAQ composite index, NASDAQ created a classic “head and shoulders” reversal pattern which often presages a reversal of the former pattern, which was rising. However, instead of declining, the index is rising - if it continues for a little bit more it could create a reversal to the prior reversal pattern and predict an important breakout for the NASDAQ. This is of great interest to small cap and technology investors and could stimulate even greater enthusiasm for their holdings.

The level of naivety expressed by much of the various talking heads about the changes in US regulations and taxes is a bit breathtaking. If Congress is instituting the changes it is likely that the bill will be hundreds of pages long. If that is not daunting enough, the number of pages of specifics including contradictions will be a multiple of the legislative documents. For instance the controversial and badly drafted Dodd Frank Act (DFA) was 848 pages and the subsequent regulations totaled 22,000 or a ratio of 25 pages of regulations for each page that was finally passed into law. Remember currently the bulk of the employees that will administer these regulations are not sympathetic to the current US Administration. Further, when the new laws and regulations come before the Supreme Court or possibly the lower courts, they will review the testimony given to the relevant Congressional committees.

Thus, when and if we get a major piece of “tax reform” enacted, my fear is that the amount of taxes that my clients and I will pay will go up not down as the reductions of deductions and permissible expenses will cancel out any tax rate reductions.

Emotional Preparations

First I accept that I will not perfectly predict the peak or the beginnings of a major decline. Hopefully I won’t be too premature or too late. My primary defense mechanism is my TIMESPAN L Portfolio^® philosophy where I can expect to be able to be defensive in certain parts of our holdings and are willing to continue to hold other parts having our large gains converted into significant unrealized losses. One can accept these unhappy results if there is sufficient capital (largely cash) in the operating component. Without scaring them too much, I try to get clients to do the same. I accept a certain amount of substantial career risk and position myself to be able to pick up bargains during the chaos.

__________

Question of the week: How are you emotionally preparing for future economic and market declines?  They will certainly occur, perhaps sooner than expected.

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

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Copyright ©  2008 - 2017

A. Michael Lipper, CFA

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Contact author for limited redistribution permission.