Are We Refighting the American Revolution? - Weekly Blog # 959

 

 

 

Mike Lipper’s Monday Morning Musings

 

Are We Refighting the American Revolution?

 

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

            

 

 

People Unhappy with Both Major Parties

We act like very young children who protest when denied some little thing. Children, feeling denial is a retraction of parental or family love, then act out to express their hurt and confusion. These little children have matured into us, who express our hurt and confusion by communicating our perceived problems to the identified powers that be, political parties. We are no different than the brave people who came to a new land to fulfill their needs, feeling disappointed with the powerful people in the “old world” who withheld some old benefits they perceived they had.

 

The Issues Faced by American Settlers Are the Same We Face Today

Unhappy people have existed in many countries since recorded time, trying new government approaches to solve their unhappiness. Ancient Greece, Rome, and various city-states tried different approaches, but none lasted long.

 

The American Experiment

We were remarkably lucky that some of our leaders attended European Colleges or were readers of history. They knew of past failures to create governments that had hoped to produce long-term happy people. Unlike earlier attempts, leadership in the thirteen colonies were of different religions and backgrounds. Under British rule all mail had to go to England before it was delivered next door or to other colonies. Consequently, there was not a singular American thought pattern. This is why it took American leaders over twelve years from the Declaration of Independence to develop the US Constitution, and more importantly the Bill of Rights.

 

What Made the US Different is Not Totally Accepted by All Today

While we recognize the presence of the majority, our Constitution recognizes the existence of the minority, or multiple minorities who require their rights to be protected so they cannot be eliminated. The Constitution assumes and to some degree applauds a change in leadership, which increases the probability that legislation will be both a product of the majority and minority points of view. It is up to Congress to pass legislation. The Supreme Court and lower Courts determine if legislation is authorized under existing law and the Constitution. The President is elected to preside over the government, not function as an all-powerful commanding executive.

 

What Are Signs of Unhappiness?

For the last couple of weeks more stocks were sold at declining prices than bought at higher prices. (Investors only accept lower prices when they are displeased with their holdings.) In the current week, 70% of New York Stock Exchange (NYSE) listed stocks declined vs 60% of NASDAQ stocks. In the latest weekly sample survey of the American Association of Individual Investors (AAII), 53.3% were bearish for the next six months vs just 28.8% bullish. Using the average year-to-date investment performance of mutual fund sectors, Commodity funds were +26.78%, World Equity funds +13.26%, and US Diversified Equity funds +11.00%. (Clearly showing domestic inflation has investors worried.)

 

Both US Courts and many Foreign Governments are unhappy with the current administration. We will see this coming week if attendance at the United Nations meeting in New York is lower than expected. Also, this week, Chairman Xi meets with President Trump. Will that change other countries’ attitudes toward the US?

 

What are Your Thoughts?

 

 

 

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Mike Lipper's Blog: Survival First, Before Growth - Weekly Blog # 958

Mike Lipper's Blog: Are We in Normal or Historic Times? - Weekly Blog # 957

Mike Lipper's Blog: Is the Volatility of Data in Hiding? - Weekly Blog # 956

 

 

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Misperceptions: Contrarian & Other Viewpoints: Majority vs Minority - Weekly Blog # 897

 

 

 

Mike Lipper’s Monday Morning Musings

 

Misperceptions: Contrarian & Other

Viewpoints: Majority vs Minority

 

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

                             

 

 

Every day through the popular press, pundits in or out of political positions express views that our current information will lead to a happy conclusion. Occasionally it will happen and contrarians like me acknowledge that it can and may happen, but the odds it will happen are only 30% to 50%, like the odds a favorite horse winning at the racetrack. By definition, the reward for winning will be the lowest of all horses in the competition. Contrarians can select a different horse with potentially higher rewards by choosing to wager against the majority.

 

Currently, it appears to this contrarian that it’s a particularly good time to take a contrary view of the intermediate period of the US stock market. The primary reason for this view is the bullish feelings presented in the popular press with such shallow thinking.

 

The US Stock Market is Going Up

The weekend press is full of similar statements because the Standard & Poor’s 500 Index (S&P 500) rose a small amount on Thursday. (This gain was given back on Friday when 390 S&P 500 issues declined. More significantly for the week, 54% of the stocks declined on both the NYSE and the NASDAQ.)

 

US Tariffs Announced

The President or White House Personnel announced import duty rates with a limited number of the countries, which in theory would slow the growth of the expected rising deficit. (The higher tariffs likely to be charged on exports from these countries is not known for an obvious reason.) The President is well versed on restrictions imposed on US exports by each trading partner, which are labeled as “non-tariff trade barriers”. These include the following list:

Administrative & bureaucratic border delays

Censorship

Foreign exchange & controls

Import deposits

Capital movement regulations

Licenses

Localization requirements

Standards

Quotas

“Voluntary” export restraints

 

I don’t know of any summing up of the cost of the above barriers, or others not identified. I have seen knowledgeable estimates that are roughly twice the size of the tariffs. President Trump started the whole discussion about tariffs to get high-level meetings with some of the “right” people around the negotiating table in order to deal with the “NTB” issues imposed by various individual countries. As this has not yet happened, I wonder if we have seen a final answer to both the tariff and non-tariff trade barrier issues.

 

Markets Are Not Waiting

Businesses and investors must execute global trades and make investment decisions every day in the absence of firm conclusions to these and other questions. The US dollar relative to other principal currencies has fallen about 12% in 2025, with more expected. This week, Barron’s quoted a participant saying, “The days of the world letting America live beyond its means are rapidly coming to an end.”

 

The Wall Street Journal (WSJ) publishes the price movements of various securities indices and commodity prices each Saturday. This current week 61% of the prices declined. It appears many purchasers of goods and services are not demonstrating an inability to act but are instead unwilling to transact under today’s conditions and outlook.

 

Please let me know what you are thinking.   

 

PS

Some of our subscribers may have known my brother Arthur, who passed away peacefully Sunday afternoon. He led a long productive life helping many people on both coasts and two oceans.

 

 

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

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

Mike Lipper's Blog: Inconclusive Week Hiding a Big Problem - Weekly Blog # 894

 

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An Uneasy Week with Long Concerns - Weekly Blog # 884

 

 

 

Mike Lipper’s Monday Morning Musings

 

An Uneasy Week with Long Concerns

 

 

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

 

                             

 

The Week that Was

Harkening back to an old London-based television program focused on the week’s changes, the following items of interest and perhaps importance crossed my computer screen:

1.  Two brief bear-market type rallies.
2. The US dollar broke par on Friday, finishing at 100.102. (Marcus Ashworth of Bloomberg believes that as much as some try to find a successful substitute, it can’t be found.)
3. Price signals – The Baltic Dry Index fell to 1274 vs 1729 a year ago; The ECRI industrial price index fell to 113.27 or -4.33% from a year ago. (This index measures the prices of industrial materials needed for production e.g. metals.)
4. Only Precious Metals and Dedicated Short mutual fund averages gained for the week ended Thursday.
5. Volatility increased in the week, with InfoTech stocks leading with gains of +9.67% while the Hang Seng Index fell -8.47%. (Normally the high/low spread is closer to high single digits than 18 percentage points.)
6. Market liquidity may be a major contributor to the market indices ranking year to date; DJIA -6.94%, S&P 500 -10.43%, and NASDAQ -15.14%.
7. Both analysts at Morgan Stanley and those contributing to Seeking Alpha Quant Ratings downgraded mid-cap investment bankers and mid-sized fund manager stocks. (Compared to their larger peers they rely almost exclusively on their brains, rather than a combination of brains and capital.)

 

Longer-Term Implications

• Howard Marks believes we have seen the best economic period in history.
• Marcus Ashworth believes we have entered the beginnings of a new phase this week.
• President Trump has told associates that he can tolerate a recession, but he is afraid of a depression.

 

Question: Do any of the elements mentioned in this blog aid or lead to a change in your thinking?

 

 

 

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Mike Lipper's Blog: Short Term Rally Expected + Long Term Odds - Weekly Blog # 883

Mike Lipper's Blog: Increase in Bearish News is Long-Term Bullish - Weekly Blog # 882

Mike Lipper's Blog: Odds Favor A Recession Followed Up by the Market - Weekly Blog # 881

 

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Professional Worry Time vs Amateurs’ - Weekly Blog # 865

 

 

 

Mike Lipper’s Monday Morning Musings

 

Professional Worry Time vs Amateurs’

 

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

 

 

 

Domestic Numbers of Concern

Recently, the three main stock indices reached record price levels, causing a lot of electronic babble and printers to spill ink. While the amateurs ate it up, the “pros” worried about different sets of numbers.

 

The worrying numbers came from the domestic fixed income world, where risk-spreads (interest rate differentials) were extremely narrow. The US Treasury spreads between 2-year and 30-year bonds narrowed to 32 points. I have difficulty finding a scenario over the next thirty years where this is appropriate.

 

Barron’s data allows analysts to look at a similar narrowing between 10-year high grade bonds and similar medium grade bonds. Comparative yields have narrowed to 44 basis points from 116 points a year ago.

 

What may be supportive of these concerns is the latest American Association of Individual Investors (AAII) sample survey. The sample survey has a good long-term record but is often wrong in assessing the outlook for the next six months at turning points. The most recent survey shows 37.1% of the respondents being bullish and 38.6% being bearish. (This is the first time in my memory that the bears have been stronger than the bulls. The sum of the two estimations equals 75.6% of the sample, reflecting the intensity of the views on both sides. A normal distribution would be about 40%, 30%, and 30%.

 

International Concerns

Strange to say, not everyone in the world is as intensely focused on the US stock market. There is a small group of activists concerned enough to maintain active communication with the person who can disrupt the economy and politics---President Trump. The fact that these “heavy hitters” find it necessary to maintain contact is another risk investors should be concerned about.

 

Researching successful small companies internationally is much more complex than doing it domestically. Many small companies are still effectively private and are led by an entrepreneur. In many cases these organizations cross borders easily, initially through industry contacts like many of our own companies. Part of the skill set needed is identifying how the countries really work. Families are much more important in mainly multinational countries. Critical financial arrangements initially start with private sources. Most small companies expect to be multi-generational, even though they can be bought by the right large company at the right time.

 

 

 

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Mike Lipper's Blog: SPORTS FANS SELECT CABINET & OTHER PROBLEMS - Weekly Blog # 864

Mike Lipper's Blog: Reading the Future from History - Weekly Blog # 863

Mike Lipper's Blog: Inflection Point: “Trump Trade” at Risk - Weekly Blog # 862

 

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Our Self-Appointed Mission - Weekly Blog # 846

 

         

 

Mike Lipper’s Monday Morning Musings

 

Our Self-Appointed Mission

 

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

 

 

 

“The World Turned Upside Down” 

“The World Turned Upside Down” played as the British Army marched off the Yorktown battlefield, ending the last military action of the American Revolution.

 

The Sunday announcement caused me to kill the draft of the intended blog for this week. 

  

With the letter announcing the end of President Biden’s campaign for a second term and his endorsement of Vice President Kamala Harris for President, the whole focus of what is important to investors changed. These events made me contemplate the meaning of the British army signaling the end of their military operation in America on October 19th, 1781. 

 

The rest of the world recognized that the US had become a world power one hundred and ten years later, on the 10th of December 1895, when the peace treaty ending the Spanish American War was signed. The US became a Pacific power for a while with their occupation of the Philippines. During the time from the end of the American Revolution and the end of the Spanish American War there were other wars, including the bloody Civil War. 

 

While I cannot determine what the critical events will be, or when they will happen, I expect it won’t be a smooth process. The Democrats are likely to form a circular firing squad. The Senate will be the center of power, surrounded by Governors, the money groups, and others who can make things happen from a protected position in the final run.      

 

Somewhat later the Republicans are likely to have their own internal battles between their top-down and bottom-up factions. 

 

While foreign governments and their internal forces were already influencing US activities and having an impact on US actions, it is more the case now. In the past it was the Europeans who played this role. Now the Asians will be the change agents. With President Trump’s desire for a weaker US dollar, he will have to successfully deal with China and Japan’s internal problems and also their trade with us. They are the two largest holders of dollars. China has grown twice as fast as the US for some time, although they are now close to a contraction. Due to changes in government philosophy, Japan needs to increase international trade. 

 

There is an increasingly large gap between the politically oriented stock market players and operating business managements. Quite possibly, the enthusiastic market players are going to wait to see how the following events play out, the attempted assassination of President Trump, the withdrawal of President Biden for his second term, and his endorsement of his Vice-President to replace him.

 

The US growth rate of consumer sales has been in decline for some time, causing executives to cut employment and dispose of less attractive operations. Companies have also had to juggle prices, quality, and the packaging of smaller quantities at old prices. 

 

Preview: 

I was preparing a piece on asset sector fund performance that I hope to finish if the world settles down. Past performance will likely be an aid in future selection. Perhaps next week. 

 

 

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Mike Lipper's Blog: We are Never Fully Prepared - Weekly Blog # 845

Mike Lipper's Blog: What I See and Perceive By Observing - Weekly Blog # 844

Mike Lipper's Blog: Preparing for a Recession - Weekly Blog # 843

 

 

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The G7 Meeting in Its Demise as a Policy Making Body Was Useful - Blog # 529

The current focus on worldwide tariffs, particularly those of Chinese and American products, was kicked off by President Trump at the G7 meeting held  in Quebec. 

·       Mohamed El-Erian, formerly head of PIMCO and now chief economic advisor to its owner Allianz, recently stated that “The failed G7 Summit dealt a very public blow to a once powerful grouping that had already been challenged by global economic re-alignment, the emergence of the more representative G20, and new forms of regionalism.”

·       Today the leading German auto manufacturer suggested that there be no tariffs on autos within the market that uses the Euro. This is a reaction to a suggestion that the American President made at the meeting.

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Critical Time for Critical Questions - Weekly Blog # 518

Introduction

Critical Time

For the US stock market, we may be at a critical time or juncture leading to materially higher or lower stock prices. Are we pausing in a correction or are we on the way to a full bear market of about twice the decline already experienced, or worse? Are we in the process of successfully testing the February bottom?

To me, as both an analyst/portfolio manager and a handicapper trained contrarian, I think the odds are good for the first, but not the second. To me, as an observer at the  race track, favorites typically win about a third of the time. I look at sentiment readings and the mainstream media for clues. Given three choices, bullish, bearish, and neutral, the latest weekly survey sample of the American Association of Individual Investors (AAII) has pushed the bearish button to being a slight leader. Normally, most investors are bullish most of the time. Their views are being reinforced or led by large elements of the coastal media who are proclaiming the market slide as confirmation of the supposed failures of President Trump.

Using my training as a racetrack handicapper, I suggest the odds we are experiencing a successful test is better than 60%. Those odds are in the same neighborhood as investors’ own various mutual funds which are 67.74% in equity funds. (Strange how the 2/3 to 1/3 split is similar to the standard attack format for successful battles won by the US Marines.)

As focused as most investors are on the next general direction for the market, the key is not the tactical direction, but the answers to long-term strategic questions. Just as at the track, the key to walking away a winner in dollars is how one handles the betting money. The key to being a winning investor is reasonably answering the following strategic questions.

Critical Questions

The single most important question (usually not answered) occurs when someone asks for a stock recommendation. Until a stock is no longer trading, history suggests that it will have a plus sign in terms of its performance for some period. Thus, it is not whether this stock will rise in price, but whether it will rise over a pre-designated time span. Just as it is a mistake to bet on every race during your day at the track, it is also a mistake to have a single portfolio that one believes will be a winner for the current, intermediate, and long-term. This is particularly true today, with half the stocks disappearing over the last twenty years or so.

We have been an advocate for dividing institutional and individual portfolios into separate time-span portfolios. Different securities are likely to dominate the short-term or Operational Portfolio, Intermediate or Replenishment Portfolio, longer term Endowment Portfolio and the beyond the control of the current investor Legacy Portfolio. I would be pleased to work with subscribers to construct these portfolios. The following are not recommendations but illustrations as to what we would be looking for in the candidates:

• Short term/operational Portfolio - mutual funds with a balance of short-term high quality fixed income and high quality liquid stocks
• Intermediate/replenishment Portfolio - medium price/earnings ratio stocks paying average dividends
• Longer-term/endowment Portfolio - mutual funds of established growth companies with high return on tangible assets and p/e no more than 150% of market
• Legacy Portfolio -  funds or companies that look to the next generation of leadership e.g. Berkshire Hathaway*

*Held in client and personal portfolios

One of the most difficult questions to deal with is the measurement of success. To the extent that a portfolio is meant to produce capital (principal, income or total return), the clearest measure is absolute return. If there is a competitive need to be fulfilled, then an external index or indices are needed. (University endowments are in competition to get the best faculty and foundations are in competition to get grants.) The critical key in choosing a measuring rod is how the index is constructed and changed, the rigor of measurement, data availability, and whether the proposed portfolio will be restricted to elements within the index. I have a bias in favor of using mutual fund indices and averages when they qualify. Some of the areas they cover include market capitalization, growth, value, and core, world equity and debt, sector funds, mixed asset funds, various types of bond and credit funds, and different types of money market vehicles.

Be very careful not to lump conventional mutual funds in with Exchange Traded Products (Funds and Notes). While both are registered under the Investment Company Act of 1940, they are designed and largely used differently than the larger universe of conventional mutual funds. Exchange Traded Products do not have cash to buffer market price changes and flows, they have relatively fixed portfolios and are primarily used to express specific long or short points of view. The bulk of their volatile flows come from trading organizations or advisors who trade their accounts. Recently, they have not been particularly good at handling these difficult markets. According to The Wall Street Journal which tracked the price performance of 72 stock indexes last week, including currencies, commodities and ETFs, there were no ETFs in the top 21 or bottom 27 slots. This suggests to me is that the market is reconstructing the winning and losing groups.

The purpose of comparing performances of various instruments is to create awareness of what is going on and to manage expectations. The result of measurement leads to an understanding as to what portion of one’s portfolio is for investment or speculative purposes. The answer is not always found in the nature of the instruments, but how and why the owner uses them. The market needs both investors and speculators as they often trade with each other to enlarge or reduce their universe. The changes in the value of investments and speculative vehicles are dependent on these trades. Market prices don’t generally move a lot unless investors are selling to speculators or the reverse. For example, during periods of high price momentum, with the exception of scale orders to enlarge or reduce the size of a position, wise investors should leave the action to the speculators.

Questions of the Week:

How many, if any, sub portfolios do you use?
What is the ratio in your own account of investments to speculations?
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Look to London When Seeking Global Views

Introduction

Too many American investors and managers do not search for investment wisdom beyond their national borders. For years Byron Wien wrote about "the world's smartest investor who has passed away.”

 I do not have the skill to identify the smartest investor. For decades I have been calling on some very smart investors in London. Some of these were clients of various fund data services and resulting consulting. Others were leading investment shops or investment trusts. I continue this journey.

This last week I accompanied my wife Ruth to London to hear our New Jersey Symphony Orchestra's wonderful music director, Xian Zhang conduct a superb concert at The Proms, held in the Royal Albert Hall. I took a ‘busman’s holiday’ and spent the rest of the week speaking with a number of great money managers, corporate leaders, old friends and former associates. As usual our far ranging conversations covered both the current global investment environment through to multi-generational investing.

Shakedown Cruise

Most of my British friends don't know what to make of President Trump. He is a definite interruption of the past policies and trends that they had become accustomed. The only way I could help them with their concerns was to explain that the current occupants of the White House have embarked on what the US Navy does immediately after it launches a ship. The Navy conducts a "shakedown cruise" where the crew learns how to handle as many of the problems that might occur in carrying out their missions. From a training viewpoint, the more problems the better. Over time they learn to solve most of the problems. At the beginning of the cruise the crew does not know how long the shakedown effort will last.

I reminded my hosts that the President learned command at military school. He is a product of a Queens County, New York real estate family. Using his threatening negotiating skills, he successfully attacked other New York City boroughs and regulators to accomplish his business goals.  

President Trump is going to be different. The intramural battles in Washington are what the founding fathers expected. They did not want an imperial king. We all are going to have to learn the new dance steps to unfamiliar music.

International Investors and the US Markets

For international investors putting money into the US, it is a double bet on the dollar and local stock prices. In the past these moved in the same direction which increased their total returns. More recently while share prices were rising, the value of the dollar was dropping. (One good technical market analyst believes the dollar is "bottoming" and will rise to new highs.) Due to a left leaning press, many in London tie it to Mr. Trump. I see it very differently.

To me the dollar should not have been strong for a number of years, which in part was a contributor to the 2016 Republican electoral wave, all the way down to state legislatures and counties. The reason the dollar was strong until recently was that almost all other currencies were weak in view of their own problems. The prospects in many of these countries are sufficiently improving to a point that the locals are reducing their conversions into dollars. (I have not yet seen a reversal where there is significant selling, just less buying.) This phenomenon is being recognized by US investors who have been replacing some of their domestically-oriented mutual funds with international funds, a trend that has been going on for many years. We are also participating in this trend for our accounts.

When I see very successful multi-generational families, I look at their investment portfolios and philosophies. Most of the positions in the trust-quality portfolios are not likely to be top performers, near term.  Thus, they won’t make the lists, to use a British expression, of the “Tops of the Pops.”  As it is almost impossible to always be in the most popular successful stocks, there will be times when these former leaders will under-perform. Thus their records will appear to be more cyclical than the somewhat slower moving secular growers.

Harking back to my first professional investment job at a trust bank, the multi-generational families opted for quality of management and products. Today the long-term concerns of multi-generational investors remain focused on quality and selectivity. We seek to answer these issues in the Endowment and Legacy segments of  TIMESPAN L Portfolios^®, though these portfolios may contain other instruments that are more price-sensitive as well.

Interesting enough, the striving for quality has a place in their portfolio investing in under-served markets and these exist in all societies. The keys to these investments is to be providing uplifting services to the underserved.

The new European regulations coming into effect in January, MiFid II will raise the costs of both investors and brokers, which will lead to a reduction of investment industry capacity and is likely in the short-term to reduce the support for smaller and many mid-sized stocks.

There is recognition of the large and growing global retirement capital deficit, but at the moment no one is addressing it in a major way.

Short-Term Concern

While we focus long-term, we do not ignore short-term. One of the short-term factors that we look at is the relative yield dispersion, what Barron’s calls Best Bond and Intermediate Bonds, based on credit quality ratings.  In the last week, the demand for Best Bonds drove their yields down by 12 basis points, and prices up,  whereas the Intermediate Bonds’ yields dropped by 5bps.  The increase in price of the Best Bonds relative to the Intermediates is viewed by some as a bearish signal for stocks.  

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