Inconclusive, But Trending Lower - Weekly Blog # 733

                                    

Mike Lipper’s Monday Morning Musings

Inconclusive, But Trending Lower

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

We Want Clarity

In truth, we don’t know what the future holds for us, our families, country, world, and oh yes, our investments. In terms of the US stock market, we are searching for a sign or a group of signs giving us the courage to act, hopefully before others. I am an optimist and a contrarian, based not on personality, but arithmetic. Markets spend most of their time trending on average in one direction or the other after turning points emerge. Those of us who find bull markets more pleasant and profitable than bear markets are in search of a turning-point. We have been conditioned to at least anticipate the end of a directional move before a major reversal to a new one. This makes sense because turning points occur when there is a dramatic difference between buyers and sellers in their transaction volumes When this happens an emotional low or high point is reached, although an actual low or high often happens on a different day with materially less volume. Historically, lows and highs are tested at least once, if not multiple times, without establishing new highs and lows. This week was not such a turning point in my opinion.

The Week Ended Friday the 13th of May

On the New York Stock Exchange (NYSE), 47% of the stock listed reached a new low. Similarly on NASDAQ, 49% reached a new low. Perhaps more convincingly, the volume of declining prices was about twice that of rising prices on the NYSE (16.6 million vs 7.9 million); whereas on the NASDAQ it was about three times (15.0 million vs 5.1 million). The plurality of the selling was more dramatic than the indices dominated by large caps. (Dow Jones Industrial Average (DJIA) -6.36%, S&P 500 -2.41%, and NASDAQ Composite -2.8%). Perhaps the relative performance of mutual funds reflects the extremes of fund shareholders’ fears. The best performing large sector was US Treasury Funds, with the weakest being Precious Metals Funds.

Intermediate-Term Outlook

Prices, interest rates, and yields reflect participant feelings about current levels and their impact on future results. The Producer Price Index (PPI) read +15.68%, the JOC Industrial Price Index +9.47% (already starting to fall), the Consumer Price Index (CPI) +8.24%, Inflation 4.21%, and the Broker Call Loan rate 2.75%. What could be more indicative are fund flows into Chinese domestic funds, which almost doubled this last quarter from their 2nd quarter in 2021 (816 billion RMB vs. 456 billion RMB).  

Other concerns include the S&P 500 declining for the first four months of the year, as most of the time the remaining 8 months cannot break even for the year. For some time market capitalization has provided a good clue to stock price performance, presumably because the large-caps are more liquid. However, when analyzing fund performance by market capitalization this week, there does not appear to be any appreciable difference in year-to-date performance.

Longer-Term Concerns

Secretary Yellen is pushing a minimum global corporate tax, part of the redistribution effort in the US and an effort to destroy sovereignty. Our contacts in Washington suggest these proposals will have difficulty passing the US Senate. The mere fact that it is being proposed generates a market and economic negative that worries some.

Initial Thoughts About the New Bull Market

As usual, I am premature in thinking about the future. Because it takes me a long time to research and make up my mind, I need all the time and help I can get from subscribers and others. Below are a few briefs of my thoughts, which I hope will spark a response.

• Service companies look to be better than goods companies due to the limited amount of talent available. This will lead to favorable pricing.
• Invest in countries and people that are honest, save, and are believers in a practical education.
• Invest in technology that uses new ways to solve problems.

Please share your thoughts now, even though we probably have considerable time before the new bull market comes. The new bull market will probably be led by other names than the old.

 

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

https://mikelipper.blogspot.com/2022/05/havent-found-bottom-yet-investments.html

https://mikelipper.blogspot.com/2022/05/three-worries-april-near-term-slowdown.html

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

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Dull Markets Are Dangerous for Investors - Weekly Blog # 683

 

Mike Lipper’s Monday Morning Musings

Dull Markets Are Dangerous for Investors

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

Why?

Not only because “quiet comes before the storm”, but dull markets give you the luxury of time for thinking and researching. Investors can use unhurried time to search for better investments and improve on the selection process, although most investors focus their energies on security selection. Some wise investors will ponder the processes used to manage their investment responsibilities, while commentators focus on the first group in the majority. As an investor for more than sixty years managing money for a limited number of investors and for my large family group, I am more concerned with the second need. Few pay enough attention to a periodic review of how we make decisions. Assuming you can make reasonable selection decisions, improving the decision processes will produce better results for the beneficiaries of your efforts in the long run.

Why Now?

Rarely can we assess in an unhurried fashion and review how we think about investing. We have such an opportunity right now. For at least the last six weeks the popular US stock market indices have been fluctuating within a trading range on relatively low and unconvincing volume. This is very logical if you believe equities are primarily priced on what they are expected to report in future periods, not what they have already reported. Expected future earnings are usually discounted at the current “riskless” interest rate of government bonds. Currently, many believe interest rates on US Treasury paper insufficiently discounts future inflation, pointing to the weakness in the valuation of the US dollar in multiple foreign exchange markets.

Others feel that after more than year of stock market gains it is time for a rest. Some point to the likelihood of not as favorable earnings comparisons after an expected large jump in the second quarter, especially when compared to the slow initial rebound in last year’s second quarter. Naturally, third and fourth quarter comparisons are expected to be more labored considering the 2020 recovery began picking up steam in the second half. (On the same basis, some believe earnings gains in 2022 will have tougher comparisons versus those in the coming quarters of 2021. Current spending plans for the rest of this year very much favor consumption with a lower investment value than productive capital expenditures.)

US stock markets are currently being held back by what one large US bank affiliated brokerage firm refers to as the 3 Rs= Rates, Regulation, and Redistribution. Some global investors, including those in the US, see foreign stock markets performing better than those in the US, as shown in the following table:

Stock Market Year-to-Date Gains

Canada        +20%

South Africa  +17%

France        +16%

U.K.          +15%

Taiwan        +15%

How to Improve Your Investment Processes

There are several ways to improve the various processes, unfortunately they require more work than  the sound-bite/pundit driven world would suggest. Often, the best communicator is more of a commercial success than a better investor. 

People like quick comparisons that lead to an ordinal ranking result, often leading to the identification of a leader at the peak of their performance. One of the more successful institutional investors, Marathon Asset Management, decries this approach in the following quote “categorization purposefully reduces complexity and nuances”.

Nuances are critical to the understanding of comparisons, no critical analysis of peers is simple and straight forward. The following is a list of categories: stocks, bonds, growth, value, return on sales, operating earnings, earnings per share, book value, and tax rates. On a personal level, what about our significant others, or the schools we chose to attend. What is missing in these comparisons is the attention to quality, sustainability, integrity, personality, and the fit within the existing structure or portfolio. I suggest statistical comparisons do not provide answers, although they are useful in framing important questions exploring the answers to the “soft” questions.

Another critical technique is to not pay more than once for the same positive. For example, the chance of success for a company developing a new product or service creating new customers and opportunities is generally priced into the value of that stock. However, that premium should be eliminated once the product is on the market and operating earnings from the new product are counted in current earnings. R&D is critical for many large companies to maintain existing earnings power, it is therefore not worth an added value.

Turnarounds can be great investments, but the key is understanding if they can keep adding value in the future or are one-trick ponies. Proxy statements are useful in this analysis. After a new CEO has been in place for about five years, the degree of senior management and director turnover provides a clue as to whether the heavy work of the turnaround is complete or ongoing.

While I would be happy to discuss other analytical techniques with subscribers privately, I will include one final critical analysis for portfolio managers. How a considered investment modifies the existing portfolio and at what cost.  A new investment will determine how the existing portfolio is modified and at what cost. Is the new investment going to reduce the chance of risk or add to performance in good periods? How much time will be needed to follow and deepen an understanding of the new investment? What is the appropriate starting position size and what are the likely points to augmenting the size over time? Are we comfortable with the other shareholders, both old and new?

Question of the Week: 

Have you modified your investment thinking in 2021? If not, are you likely to make changes before year end?   

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

https://mikelipper.blogspot.com/2021/05/faulty-comparisons-weekly-blog-682.html

https://mikelipper.blogspot.com/2021/05/extreme-views-can-be-good-lessons.html

https://mikelipper.blogspot.com/2021/05/where-is-stock-market-going-next-weekly.html

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Where is the Stock Market Going Next? - Weekly Blog # 680

 

Mike Lipper’s Monday Morning Musings

Where is the Stock Market Going Next?

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

                          

The job of the analyst is to consider alternatives, which enables the owners of capital to make decisions concerning their separate needs and time frames. As an analyst, it is not our job to pass judgment on the proper path forward. Our task is to guess the most likely direction in terms of the most favorable risk/reward ratio. 

Combining my trained instinct as a US Marine Officer and a thoroughbred amateur racetrack handicapper, I look for better than average risk/return opportunities by avoiding massed crowds. I do this by observing what I see around me and putting together a portfolio of reasonably low risk of loss with an acceptable reward. I see market sensitivities through the following lenses: 

Stock Markets Moving in Opposite Directions 

In the latest week, the Dow Jones Industrial Average (DJIA) rose +2.67% and the S&P 500 +1.23%. The NASDAQ fell for a second week by-1.51%. The percentage of the stocks listed on the New York Stock Exchange (NYSE) hit a new high of 26% vs. 11% for the NASDAQ. According to the Dow Jones Standard & Poor’s indices, the best performing stocks were US Select Dividend stocks +3.48%. Internet Services stocks –5.3% were the worst.  Perhaps the best encapsulation of this lack of confidence was the stock price movement of T. Rowe Price (*), which reached a high of $189.42 on Friday vs its low of $179.29 on Monday. The other four days of the week produced higher volumes than Friday, which declined 40% from its peak volume on Tuesday. 

 

(*) Held in private financial services fund and personal accounts.

Mutual Funds Capture the Views of Both Individual and Institutional Investors 

For the latest 52 weeks, the average US Diversified Equity Fund (USDE) gained +60.1%, with the average S&P 500 index fund being up +47.59%. Just seeing those results suggest caution in anticipating large gains for the next 52 weeks. In the current week, the average USDE was down -1.06%, while the average Commodity fund was up +3.01%. Clearly a different assessment of the impact of rising inflation on the general stock market. 

Congressional Budget Office (CBO) Studied Views

Their non-partisan view is that by the middle of the following decade (2030s), the size of interest payments will be larger than current deficits. Paying interest on interest is not a sound financial plan. The Congressional Budget Office is also on record saying private economic forecasters have a bad record. This was before Friday’s miss on the expected surge in jobs. 

Eyeball Observations 

We visited The Mall at Short Hills on the Saturday before the US celebration of Mothers’ Day. My niece noted that there were only a few less empty store locations than about a month ago. Nevertheless, the crowd approached a Christmas season level, with one major difference, shoppers were not carrying a lot of labelled shopping bags. They must have been purchasing smaller items. I suspect they were spending their government “Roman circus” or “bribes” from the stimulus payments before prices rose further. While not many looked at Saturday’s Wall Street Journal (WSJ), those who did could see that 85% of the weekly prices shown were rising. 

The Political Game 

The only “blood sport” played in Washington DC is for the next election.  For a some aging politicians, the 2022 congressional elections leading up to the 2024 Presidential election will be their “Last Hurrah”. There are some that see George Orwell’s classic “1984” introduction of “Newspeak”, its purpose was to hide intent. For example, “War is Peace” or “Ignorance is Strength”. Today they might use “Fair Share of Taxes” for capital redistribution. 

The Federal Reserve

For those who still believe the Federal Reserve determines short-term interest rates, it is wise to understand the political position of the so-called independent governors of the Fed. The Fed is probably the only central bank that directly answers to the nation’s political power. In our case the President appoints the governors but has difficulty exercising control. Except, votes were unanimous when both the Yellen and Powell boards raised interest rates. (Various Presidents and members of Congress have tried to reduce the theoretical “independence” of the Fed.) 

In the “tug of war” between the Fed and elected politicians, the key signposts are interest rates. Low interest rates are favored by borrowers, including by a few past Presidents. Savers want interest rates high enough to cover both inflation and the incipient cost of defaults. The political problem facing politicians is that financial markets recognize government interest rates do not compensate for future inflation. Consequently, private sector rates have adjusted upward and the foreign exchange value of the US dollar has declined against a few of the available alternatives. Under an activist government at the Treasury, the SEC and CFTC can expect regulatory attacks to force a closing of the gap between government and private market interest rates. This battle is likely to lead to troubled markets.

Currently, with lots of enthusiasm in the markets, please be careful with your investments. The winning odds are coming down and reducing the risk/reward ratio, probably for a year.  

What do you think?

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

https://mikelipper.blogspot.com/2021/05/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2021/04/four-letter-words-to-sounder-investing.html

https://mikelipper.blogspot.com/2021/04/the-other-side-weekly-blog-677.html

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.