Recognizing Change as it Happens - Weekly Blog # 876

 

 

 

Mike Lipper’s Monday Morning Musings

 

Recognizing Change as it Happens

 

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

 

 

 

Perspective is Difficult to Read

When gazing out a window while traveling in a car or a plane the view constantly changes, while the view within the vehicle remains constant, similar to the internal changes we experience while investing. Many of us are aware of both the outer world and our own investment perspective, although we are often unaware of the changes in people next to us. Rarely do we focus on factors impacting our own thinking during our travels.

 

Now may be a good time to review what is happening to those close to us, and even more importantly to ourselves. The following list of items crossed my consciousness this week, causing me to consider changes to our investments. In no particular order:

 

1. While I am aware of the US stock market trading volume growing, the rate of change between the 2 stock markets is telling. Over the last 12 months trading volume on the NYSE has grown +8.03%, while the NASDAQ has grown +57.39%. This indicates that there are two very separate markets. This was confirmed by Thompson Reuters’*, an old Canadian/British firm, through their actions this week. They moved their US listing to the “junior” exchange, which they identified as the home of technology companies.
2. The AAII sample survey had only 28.4% of their participants being bullish for the next 6 months, while 47.3% were bearish.
3. The Economic Cycle Research Institute (ECRI) industrial price index was up +6.44% over the past 12 months.
4. The Chinese marriage rate has dropped -20.5%.
5. JP Morgan Chase* announced layoffs for next year.
6. International Mutual Funds were the best performing group this week for the first time in a long time, led by large-cap growth funds.
7. The Financial Times is asking how big Walmart* can get.
8.  Until we actually see the final legislation and/or a court ruling, one wonders how the US will be governed. The US executive branch of government is in the courts for changes they’d like to make, after legal challenges.

I wonder how much longer the four international political leaders (Putin, Xi, Trump, and Moodi) will remain in power.

(* Owned in client or personal accounts.)

 

We are at a period in history where multiple large changes are occurring somewhat simultaneously, with significant consequences for winners and losers. Time is a scarce resource and that creates a sense of urgency among the participants. The following events bear close scrutiny as the outcome will be consequential for all.

• Change in US government – The power dynamic is being challenged in Washington DC and the courts, with a clear understanding that power could revert to the old order after the mid-term elections. So, Republicans recognize that change must be accomplished within the next two years. If the Republicans are successful, the country will likely see smaller government with some power ceded to the states. Smaller government should come with smaller costs, a plus for the national debt situation.
• Global government dynamics – Many governments around the world are grappling with similar ideological dynamics as those seen in the USA and are nervous about what might come next. This was on full display at the Munich Security Conference this week. The potential for trade wars could intensify significantly.
• Two wars have the potential to conclude this year, Gaza and Ukraine. Not all are likely to be happy with the outcome. Nor will there be unanimity among those shepherding the negotiation. Rebuilding will be costly in both locations, with no clear indication of who will pay and what deals will be struck to compensate those investing the money.
• Significant technological changes are likely in the next few years, with AI, robotics, and automation at the center of these changes. There will likely be big losers and winners, where the first mover advantage could be quite significant.
• An energy renaissance is likely, as the new technology driven future requires substantially more power than what it is replacing. The green revolution will not likely provide adequate solutions for the energy shortages. Natural gas and nuclear power seem to be the likeliest winners, as they provide the most consistent baseloads and the smallest CO2 emissions.    

Each of these bullet points has the potential to be disruptive. Having them all occur at roughly the same time will make for a challenging investment environment. While traders may be able to trade successfully, the odds favoring investing are declining for the next several years.

 

I would like to hear contrary views.

 

 

 

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Mike Lipper's Blog: A Rush to the 1930s - Weekly Blog # 875

Mike Lipper's Blog: More Evidence of New Era - Weekly Blog # 874

Mike Lipper's Blog: Roundtable Discussion - Weekly Blog # 873

 

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Preparing for the Future - Weekly Blog # 831

          

Mike Lipper’s Monday Morning Musings

 

Preparing for the Future

 

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

   

       

 

The fundamental job of an equity investor and manager is to grow current assets to fulfill future needs. Since we don’t know what the future will be or when it will be, we should consider a range of possibilities. My training at the racetrack and the US Marine Corps supports viewing the various futures through the various lenses of security analysis. I cannot think of a more difficult set of conditions than those facing us today.  

 

The possibilities range from the outmoded thinking of present world autocratic senior leaders (Biden, Trump, Xi, Putin, and similar) to unknown people with more scientific knowledge, but little management experience. To use an expression from the track, the odds-on-bet for the foreseeable future is that our present leaders will leave the scene relatively soon. They will probably be largely replaced by leaders two generations younger, who think differently and whose mental languages are different than what we have learned. 

 

Allow me to show you a mathematical approach from my world of mutual fund analysis. My old firm continues to report the weekly performance of mutual funds broken into seven investment objectives based on the securities in their portfolios. Most of the assets are in US Diversified Equity Fund investment objectives, which are divided into 18 peer groups. In the first quarter of 2024 there were 5 peer groups where the average performance was double digits. Interestingly, for the ten-year period there were 6 peer groups with double-digit winners. Four out of the six were repeaters. While all 18 performance peer groups generated double digit returns for the most recent 1-year period, only one generated double digit returns for two years two for 3 years, and 13 for five years. This suggests that immediately prior to the pandemic was a good time to invest in the average US Diversified Equity Fund. Accepting below average returns in the short term produced good results in the long term. This further suggests that picking the right year to sell an investment is more important than the right year to buy. However, as with almost every betting rule, the opposite can work. 

 

I believe you need to pay attention to the nature of the period when buying or selling. Investors in the US market should probably recognize that the average performance year is generally single digits, which should be evaluated relative to the performance of peers. Broader considerations should be left to double digit years, like now. Bet against the crowd if you intend to sell in a holding period shorter than five years.

 

Management Structure is Not Optimal 

The President’s cabinet is non-voting and is at best an advisory group. Large meeting tables of decision makers should be avoided, be they for political organizations, business, or non-profits (including educational and medical groups). The groups needing large meeting tables are not likely to produce dynamic results. President George Washington had a cabinet of 4 people, the secretaries of State, Treasury, and War, plus the Attorney General. Our present Cabinet has 26 members, 15 Department heads and 11 Cabinet level officers. 

 

Another Focus Should Be Updated 

 I don’t have the underlying data on our government leaders, but I suspect the majority have not spent operational and/or educational time in Asia or Africa. As a global investor I believe it is essential to correct this to effectively deal with the fundamental problems coming down the road. 

 

PS 

This week there have been a number of articles about the death of Daniel Kahneman, a Nobel prize winning psychiatrist and developer of behavioral investing. His basic premise was that investors are not rational and invest more for psychological reasons than sound investment reasons. This discussion may bring us back to rational decision making with your help.

 

Like most analysts and others commenting on investments, I have done the easy half of the job by supplying my thoughts on the buying function of investing. The much more difficult function is the disposal of investments, which is normal for the investment related committees of the two tech-oriented universities on which I serve. The reason for this one-sided effort is that making a buy decision is relatively easy.

 

By far the more difficult task is deciding to sell all or a part of an investment, which is a much more a personal decision and much more complex. The decision process should deal with some or all of the following topics:

• Likely reaction when other critical investors find out.
• Tax implications.
• Impact of the decision on the rest of portfolio.
• Dealing with beneficiaries.
• Legal aspects.
• Performance results.
• A least 10 other factors

I intend to share my impressions over time, with the thought that my audience of bright, experienced people will share their reactions. The reason I mentioned the groups of bright people I am connected with is that I learn how they approach various investment problems and use this information to address issues we all need to manage.

 

Next week, most of the blog will be devoted to an article produced by a brilliant well-rounded Professor from the Stevens Institute of Technology. The article explores how government actions had an unintended inflationary impact.

 

I am very interested to hear your reactions to this experience.

 

     

 

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Mike Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830

Mike Lipper's Blog: Fragments Prior to Fragmentation - Blog 829

Mike Lipper's Blog: Collateral Rewards, Risks, & Opportunities - Weekly Blog # 828

 

 

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Manageable Risk - Weekly Blog # 790

 

Mike Lipper’s Monday Morning Musings

Manageable Risk 

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

 

 

 

Uncontrollable and Controllable

Every day in almost every activity we can increasingly be the victims of bad things. That is certainly true of our investment activities. Short and long-term weather, misjudgments of governments, inflation and deflation, as well as other accidents. Essentially, these are beyond our personal control. We can try to anticipate or at least recognize these risks and attempt to take some defensive measures.

 

Controllable risks can be addressed by our own actions. In our investment actions we should be aware of the various mistakes we could make. Both large and small errors should be avoided, usually by being more patient. In making investment decisions it is wise to remember what our changing attitudes bring into the decision process. This summer may be a particularly important time to recognize that we may have entered a new phase of the market.

 

The Game May Have Changed

If you pay attention to what various pundits in the media, political office, or investment circles are saying, we are either in a "bull or bear" market. Quite possibly we are in neither and have not been in either for some time.

 

Market cycles don't follow calendars or the movement of selected indices. Investments don’t move in lockstep with one another either. My particular laboratory is the weekly performance 109 identified mutual fund sectors invested in equity, debt, currencies, commodities, and combinations of largely publicly traded investments.

 

For a two-year period ended Thursday, 83% of the individual sector averages were negative. The 28 sectors showing gains were led by Japanese funds, Energy and Natural Resource funds, Capital Appreciation funds, Alternative funds, S&P 500 index funds, Short-Term funds, and Money Market funds. (Some stock indices also reached higher price levels in this period.)

 

Two Down Years Suggests a Change

We have quite possibly entered a different phase of the market and economy. We may have entered a period of Stagflation. In the last century there were two such periods, the Great Depression into early WWII, and the mid-1970s to late 1980s. The latter period killed a popular view of buy and hold forever. In both periods there were periodic and unsustained rallies of 20% or more for the indices, and much more for individual stocks. Both periods of stagnation were led by government actions attempting to prolong an aging economic expansion. These government actions hurt investor confidence levels and suggested to the public that the economy was better off left alone in returning to equilibrium.

 

Some investors currently have equity money hiding out in bonds and money market instruments. These investors are itching to bring their equity commitments back up to "normal" level. They view declines as good opportunities, which they occasionally might be, but not often. Investors should not be impatient. If we are in a period of stagflation, averaging in with a small percentage during disparate time periods makes the most sense.

 

Long Shot

We all gamble on the future and have two choices about predicting the future-extrapolation of the present or making changes to it. On a day-to-day basis extrapolation is the most likely. The longer the time period, the more extreme the changes. There can also be periodic Minsky moments of great change.

 

What happened in Russia this weekend was a dramatic event that will undoubtedly change what happens in Russia for some time. The long shot is what could happen in how the US is governed. This is not a prediction, but an examination of what could happen.

 

First, we should understand what happened in Russia this weekend. Russia does not have a large, disciplined, and battle trained army. Consequently, it had to use a number of private armies, the biggest of which was the Wagner Group led by Yevgeniy Prigozhin who disagreed with the leadership of the regular Russian army. He claimed the Russian army told Vladimir Putin that Ukraine was going to attack Russia with the help of NATO. He also complained that Russian forces were killing Russian sympathizers in Ukraine. The feud got so bad that Putin ordered Prigozhin be arrested. This caused Prigozhin to send his troops to within 120 miles of Moscow, before some settlement was reached and the arrest warrant was dropped. It was arranged for Prigozhin to go to Belarus, a Putin friendly country.

 

The key point for the US is that Putin now has less confidence in his advisers. When powerful leaders lose confidence in their people, it is often like a disease or plague potentially leading to isolation. As this plague can impact any dominant, semi-isolated person, it could impact the current White House. There are many observers who say the current "Obama White House" and Cabinet is possibly the worst performing the US has ever had. If the President is re-elected, he will be a lame duck, making him an unattractive boss for any rising politician. Thus, major changes are expected, either for career choice reasons or due to the President's wishes.

 

Changes in interest rates will have a relatively small impact on the economy. Considering inflation is generally caused by excess demand over supply driving prices higher. What is needed are customers willing to pay higher prices for more attractive goods and services. This, however, is not what Washington is looking to do,  so there may be a change.

 

Future Outlook Appears Troubling

• After a trend is recognized investment groups often change their published outlook for the period ahead.
• It has become popular to expect business conditions to get increasingly more stressed, with interest rates rising and loans becoming more difficult to get.
• China, the second largest economy is facing its own debt problems, both at the provincial level and in real estate. The big difference is how they are handling a problem similar to that in the US. They are doing it differently.
• The latest US academic test scores show 13-year old's materially declining in reading and math. Perhaps most damaging is a drop in reading for pleasure, which appears to be at a record low.
• The Chinese central government has outlawed tutoring children in order to create greater equality, although parents and grandparents feel differently. A recent article in The Financial Times shows "illegal'' tutoring thriving, at least in the top cities. Tutoring is viewed as a way to improve a student's chance of getting into better schools and universities and consequently getting a higher paying job. When constructing investment portfolios, you should consider the consequence of a decline in US secondary school learning and a decline in college applications while China and other countries show improvement in preparing future leaders.

 

Conclusions

Investors need to recognize change while continuing to focus on long-term goals.

 

 

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Mike Lipper's Blog: Predictions Suffered Last Week - Weekly Blog # 789

Mike Lipper's Blog: Head Fake, Unrecognized Opportunity, or a Minsky Moment - Weekly Blog # 788

Mike Lipper's Blog: The Course to Explain Last Week - Weekly Blog # 787

 

 

 

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Three Worries: April, Near-Term Slowdown, and Long-Term Euro/Asia - Weekly Blog # 731

                                    

Mike Lipper’s Monday Morning Musings

Three Worries: April, Near-Term Slowdown, 

and Long-Term Euro/Asia

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

April’s Bear Market

Our last blog labeled the three most popular US stock indices with their media pundit titles, which now need to be revised based on this week’s performance. Using the size of the drop from previous high points:

DJIA           -10.39% Correction

S&P 500           -13.82% Correction Continued

NASDAQ Composite  -24.18% Bear Market*

                  

*From 11/12/21 Peak

While the two more senior historic indices have not confirmed a bear market, retail sentiment for the next six month is extremely bearish. The American Association of Individual Investors (AAII) latest weekly survey summary indicates a 59.4% bearish view. This is the deepest bearish percentage I remember. (As a contrarian who is often premature, I am looking forward to a rising market in the indefinite future.) There were 989 new lows for the week on “the big board” and 1570 on the NASDAQ. Investors should be alert to sharply rising stock prices the morning after a down day, where over-leveraged short positions were liquidated by custodians. 

With short-term rates rising, borrowing costs have risen sharply and apparent levels of liquidity are drying up. Toward the end of the month a number of major companies reported earnings that were disappointments. This was due to lack of demand, excess inventory, supply shortages, and an unfavorable mix of workers with questionable skills and attitudes willing to work. Returning to the office is proving to be more difficult and expensive than many thought. No wonder many viewed April as a bad month.

Berkshire Hathaway - Annual Meeting, 1st Quarter, & Best Portfolio Analysis Lab

Berkshire hosted its first physical annual meeting in three years, publishing its first quarter report and providing insightful portfolio analysis. I regularly attend the annual conference, both as a portfolio manager of accounts owning positions in the Berkshire and personally as a long-term shareholder. I left Omaha with a number of insights I would be pleased to discuss privately with subscribers. The following are briefs of those views:

1. The long-expected transition is underway, from an exclusive focus on speaking roles by Warren Buffett and Charlie Munger, to speaking roles by the two Vice Chairs. Additionally, there was the election of a couple of younger directors.
2. The leadership of value-oriented stocks is slowing on a relative basis. In the first quarter, insurance operations and their investments produced poorer results. However, it was expressed that results would be better in the future based on greater use of technology and better training. Furthermore, the railroad needs to improve its results through better training and the possibly of only engineers on trains. While the remainder of the operations also produced acceptable results, some operations experienced supply shortages and slower sales than expected. It would not surprise me that some activities over inventoried, which led to first quarter sales being less than planned. Perhaps as a result, there were no stock buybacks in the month of April.
3. Not surprisingly, investment losses were reported in the first quarter. As a partial offset to these declines, Warren Buffett purchased 9.5% of Activision for the company in an arbitrage operation. (The significance of this is that it was a replay of a formerly regular activity.)
4. In a recent fund manager’s survey, the majority of portfolio managers favored value-oriented securities or loans for the rest of this year. The very current experience at Berkshire does not vigorously support the idea.

My personal conclusion is that Warren Buffett and Charlie Munger are managing the company as if it were a Trust for their and other long-term individual shareholders’ heirs, making Berkshire Hathaway a perfectly sound holding, but not necessarily attractive as a new position. 

History Suggests Ukraine’s Invasion Purposes?

For centuries the European-Asian land mass has been the prize that militant leaders and religions have sought, with a passive and submissive Ukraine an important safeguard. Historically, Russians have believed that control of the continent was providence, first with the “Popes” in Rome, then Constantinople and finally Moscow.

Aggressive leaders - Genus Kahn, Napoleon, Hitler, and Putin believed it, as did students of geo-politics. Where does Ukraine fit in? To control commerce in the Black Sea there must be friendly powers on all its coasts controlling the wealth in the ground in Central Asia, which includes Kazakhstan, the former Soviet provinces, and Iran. The Russians already have a naval port in Syria to protect access to the Black Sea and trans-Asian pipelines. Turkey recognized this threat and recently prohibited Russian flyovers to reduce the strength of Russian forces in Syria. Kazakhstan is also worried. The other big player in the region is China. China sees itself as an exporter of both manufactured goods and some raw materials to their preferred markets in Europe and Africa. There are two transport routes, one through and around Africa and the other by train across Asia and Europe. With the potential for mile-long trains crossing what used to be Russian territory, safe passage is critical. You can see that if the Black Sea is not in friendly hands, the dream of a dominant Russia is dead. I may be completely wrong, but one can see Putin’s motivations.

Questions: Do any of these thoughts suggest different investment strategies to you?

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

https://mikelipper.blogspot.com/2022/04/on-way-to-bottom-weekly-blog-730.html

https://mikelipper.blogspot.com/2022/04/short-long-term-thoughts-weekly-blog-729.html

https://mikelipper.blogspot.com/2022/04/is-this-great-investment-era-ending.html

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Successful Investing Expects the Unexpected And The Berkshire Hathaway Solution - Weekly Blog # 722

 

Mike Lipper’s Monday Morning Musings

Successful Investing Expects the Unexpected

And The Berkshire Hathaway Solution

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

This was the week that demonstrated that successful investing is an artform, not a science. Most professional investors entered the week secure in their certified knowledge of investment accounting and regulations. These are essential, but insufficient to avoid losses and capture gains from unexpected changes. An understanding of history, particularly military history, is a very useful tool. Additionally, an understanding of the behavior of beneficiaries of large wealth is also helpful in managing both personal and other accounts.

In the US Marine Corps, whenever possible, each major amphibious landing conducts dress rehearsals. Hitler did even more, he tested his air force and underground “fifth column” tactics and equipment in the Spanish Civil War, which prepared his forces for their “blitzkrieg” attack on the Western front. I find it interesting to compare the personalities of Hitler and Putin. Both increasingly became more isolated from their associates, leading to personalized decision making rather than a more controlled group analysis. The picture that was released showing a meeting with Macron and others at a very elongated table is a sign of his isolation. His mental condition led to the false historical positions in Putin’s speech that started his troops moving. 

The history of US retreats from Vietnam, the Middle East, and Afghanistan, encouraged his view. The view that US and Western European countries would not quickly and strenuously defend against his restoration of the old Soviet borders. None of these analyses are taught in CFA classes or law schools. Thus, the investment community was largely unprepared for the critical change to the real environment we faced this weekend. 

My fellow analysts, in response to the needs of their marketeers, have become scribes of reported results and near-term rumors, where predictions are largely extrapolations of present trends. Rarely are there any predictions of trend reversals, nor the identification of new competitors. Most importantly, they rarely focus on the attitudinal changes of beneficiaries of critical assets.

Probable Changes Coming to Berkshire Hathaway

I have been taken to task concerning my expressed view that after the “saintly investment lives of Warren Buffett, Charlie Munger, and many of their 80 or so operating officers are over, there will likely be a move to breakup Berkshire.  Analysts are thus violating one of the tenants of sound advice, which is to predict outcomes, whether favorable or not.

Berkshire is one of the largest holdings in our family accounts and it has produced very gratifying results for many years. Nevertheless, I perceive a dramatic change in the shareholder population on the horizon. I am extremely grateful that the present management has run the company for the beneficiaries of the present shareholders, rather than generating assets for their own consumption, unlike most public companies.

I suspect that those readers of this blog that have experienced asset transfers between generations and have noted a largely consistent pattern, beneficiaries failing to retain the older generations’ investment advisors and/or investment philosophies. After years of waiting to make their own decisions with “their” money, the first thing they do is sell out of their inheritance. They might be a bit slower if they realized there would be a materially higher valuation placed of their inheritance.

Messrs. Buffett and Munger have built a portfolio of assets with different risks and rewards based on the type of economy. I firmly believe numerous operational and investment assets could be sold to higher bidders, increasing leverage and assuming more risk. Charlie Munger has said that not every asset they own is likely to be worth their carrying value at a particular time. To the extent that individual assets are hedges against other assets, a one-time complete breakup of the company would destroy the hedging value laboriously built into the portfolio. (I am comfortable with this portfolio approach. As an investor in mutual funds, I judge their value based on their overall performance patterns over time. By definition, funds never do as well as their best position or as badly as their worst.)

 In the future, I expect a significant portion of Berkshire stock to shift to new owners. Many of the new owners would likely support an attempt to convert their wonderful inheritance into a bigger pile, showing their departed grantors that the new owners are brighter than those that gifted the money. I DO NOT SUPPORT A BREAKUP STRATEGY, but that will not preclude it from happening.

There is an intermediate strategy which could be a better approach. In the past, Berkshire has not been copied by other companies in the past in advised other investors on how they do things. In terms of of operations and investment and how they manage a holding company to generate free cash flow and tax assets. I am hopeful the same kind of ingenuity that produced the $147 billion “float” can be applied to the company. This might create a holding company like Allegheny Corp, in which I own a few shares. Allegheny owns both minority, majority and 100% ownership in a number very diversified companies, with a goal of building book value. Whether we like it or not, youth will control Berkshire at some point, and we need to recognize it. 

Weekly View

While it is possible there will soon be an end to hostilities, I don’t expect we will see a strengthened position of the Western allies, both in terms of Russia and China. We need to be prepared for problems arising out our past weaknesses.     

  

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https://mikelipper.blogspot.com/2022/02/we-are-progressing-weekly-blog-721.html

https://mikelipper.blogspot.com/2022/02/building-long-term-investment.html

https://mikelipper.blogspot.com/2022/02/changing-focus-in-changing-world-weekly.html

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We are Progressing - Weekly Blog # 721

 

Mike Lipper’s Monday Morning Musings

We are Progressing

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

                  

This is a blog on investing and is not intended to express any political views. Every single action we take, including taking no action, is an action. Every single action we take has less of a future impact for those we care for emotionally or legally, be they the next moment, day, week, month, year, or the rest of our lives. With that thought in mind, my focus is on the indefinite time periods for those we hold ourselves responsible.

This blog is focused on an investment period measured in years, comprising multiple market cycles. In sharing my thoughts, I am very conscious that humility is the only guarantee in investing. There will be periods of elation and depression as we travel through the various phases of market cycles.

Point of Departure

I believe markets move within their own cycles. I find it useful to measure from peak to trough for the styles of investing which identify most of what we do. In the absence of detailed knowledge concerning the structure of an investment account, I use three major stock indices for the US equity market. The NASDAQ Composite Index, which topped out last November, contains future oriented securities valued for their growth potential. The S&P 500 Index, which peaked on the 4th of January, is meant to contain the 500 largest and most liquid US stocks traded in the US. The S&P 500 Index is representative of the bulk of long-term US stock investments and is often used by institutions to represent “the market’. The Dow Jones Industrial Average (DJIA), which topped out on the first day of 2022, is a selection of the 30 most representative stocks.

Where Are We?

As a working assumption I believe most US equities have topped out for this phase. What phase we have entered is the question investors are asking. The choices are:

• A minor fall to a support level like the Dow Jones Transportation Index, a key component of the oldest market timing model, the Dow Theory. 
• The NASDAQ Composite Index, which fell beyond the 10% correction level used by the press.
• The S&P 500 Index, which is close to entering a correction phase, to be followed by the DJIA.

As we manage long-term money, which has long-term payout needs measured in lifetimes, I believe we have entered a downward slope with periodic upward trading opportunities. (57% of NYSE stocks and 61% of NASDAQ stocks fell last week.) Hardest hit were growth funds, with the T. Rowe Price Growth Fund falling -4.38%, the worst of the 25 largest growth funds. 

Focus

Instead of focusing on trading opportunities, I am focused on the likely investment opportunities in the subsequent rise in the market after the valley. To get to the happy hunting ground we will have to deal with expected problems. In time order: Ukraine, inflation, and Long COVID.

Ukraine

As is usually the case, the media and politicians are focused on the wrong things. First, the Russian Army has a significant number of conscripts due to return to civilian life who are not battle trained. They would suffer significant casualties, which would not go down well within Russia. If the Russians invade, they are likely to suffer casualties caused by a well-armed and trained army and volunteers. They have a lot to fight for, as shown below:

• The Largest proven recoverable Uranium resources in Europe
• 2nd largest explored Manganese ore reserves in the world
• 3rd largest exporter of iron ore
• 4th largest array of natural gas pipelines
• 8th largest number of installed nuclear plants

To an important degree, Putin has already accomplished his goal of weakening NATO by showing the unwillingness of Germany to take up arms, followed by Italy and a weak US response. So far, the only negative from Putin’s point of view is the push by Sweden’s second largest political party to join NATO.

Inflation

From the White House’s viewpoint, it is pleased the market is doing the job that the Fed was meant to do. The markets most sensitive to short-term inflation are the commodities markets, which are pricing commodities higher in the near-term than the longer-term. Members of Congress are preventing the White House from adding to the problem, by resisting an increase in money supply growth. 

A study of 19 recorded pandemics over 700 years shows real interest rates falling in all cases. However, a complete solution to the supply chain issues has several hurdles to overcome and is unlikely to be solved before the next Presidential election. These include: 

• A shrinking number of petroleum refineries, from 301 in 1982 to 124 today.
• The absence of new mineral production and severely restricted new mine and pipeline volumes.
• Fewer skilled workers and supervisors returning to the workplace due to Long-COVID. 

Long COVID

Long COVID is the inability of some workers to return to the workforce due to PASC symptoms, which stands for Post-Acute Sequalae of SARS COVID. (Cumberland Advisory has a good blog on their panel discussion on the subject.) One study predicts between 10 and 20% of those who get COVID will get the Long version. One must expect other pandemics in the future, and we have not yet come to an understanding the best way to reduce their damage.

Investment Shopping List

While it may be a long-time before a terminal bottom is hit, and more importantly recognized, one should start building a shopping list. There are two categories that appear to be worth examining: common denominators and the not yet dead that are still working.

Common Denominators

At times it is difficult to pick a potential winner out of a crowded sector. I have followed two approaches on this issue. 

1. The first is to find a sound sector manager or fund to make individual choices. The problem is that manager’s need to diversify, resulting in too many choices. The second is to find one or two stocks that capture most of the future expected benefits. Two common denominator stocks in the financial services industry are Moody’s and S&P Global (already owned). Internal developments and acquisitions should capture additional business. These are to be put on the hunting list and should not be bought today, they are already more than adequately priced.
2. The second approach is to look at the non-winners in the current market to see if the sick/dying corpses have elements that will blossom in a new market. I use the multiple of current price to sales as a primary initial filter. Four large companies that could have something to value, in order of their price/sales ratios, are: 

Corning (2.55x)

Intel (2.49x)

IBM (2.15x)

HP Enterprise (0.78x)

HP Inc (0.64x)

I am sure that there are others, and they should be researched.

Subscribers: Please share your thoughts and suggestions. We unfortunately will have some time before we select new holdings   to new heights. However, it takes a lot of time to get to know new names and get comfortable with them, after what may be an unhappy period. 

  

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

https://mikelipper.blogspot.com/2022/02/building-long-term-investment.html

https://mikelipper.blogspot.com/2022/02/changing-focus-in-changing-world-weekly.html

https://mikelipper.blogspot.com/2022/01/things-are-seldom-what-they-seem-weekly.html

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