Solo Messaging is Meaningless - Weekly Blog # 818

 

Mike Lipper’s Monday Morning Musings

 

Solo Messaging is Meaningless

 

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

  

 

 

“The Floor” No Longer Helps

Years ago, on both the New York and London stock exchanges, it was normal for members to query the assigned market-makers for a supply/demand picture on a stock they were trading. When the system worked, specialists supplied the size of supply/demand and their opinion on the next expected price needed to clear trading levels. This system worked reasonably well until the “upstairs” trading desks of some member firms began competing for institutional size orders.

 

At that point floor specialists believed they no longer had an exclusive information advantage. Consequently, when approached for a “picture” on a stock, they were reluctant to reveal any orders left with them. It quickly became clear from their responses that they were describing their own positions, or “talking their own book”. This was far less helpful in understanding where the real market was and the prices necessary to clear nearby trading levels. Over time, this left the floor to the upstairs trading desks for stocks with institutional size interests. This led to a situation where those without good relations with the institutional trading desks were at a disadvantage. Increasingly they were isolated from the flow of business.

 

The same thing happened to the distribution of news on the economy, where the distribution of economic news became increasingly biased. Today’s biases are so strong that a substantial amount of the current “news” has lost its usefulness for investment decision making, or should have.

 

A Small Example with Larger Implications

Friday’s trading was lack-luster. The three most popular stock indices, the Dow Jones Industrial Average, the Standard &Poor’s 500 Index, and the NASDAQ Composite, all moved fractionally. The movement was so small that the combined three movements only totaled 0.34%. The Wall Street Journal ran the headline “Major Indexes Eked Out a Gain…” (The WSJ is better than its competitors.)

 

My problem with this is that the Russell 3000 gained the very same 0.34%. (The Russell 3000 tracks the performance of the 3000 largest stocks, including those in the DJIA, the S&P 500, and most of the NASDAQ.) The person writing the headline at the WSJ was giving some comfort to bullish investors and those on the political left.

 

The Missed Opportunity: The Dichotomy

The WSJ also published articles on three other factoids:

1. “Supermarket giant drops Pepsi and Lays over price increases”
2. Xerox cuts workforce by 15%.
3. WSJ weekly prices of commodities, stock indices, ETFs, and currencies had only 16% of them rising.

 

The dichotomy is that while most of the left-leaning media is full of happy talk about expanding the economy, businesses are cutting back on people, locations, inventories, and some prices. One might say they are preparing for a recession, or stagflation. The bulls and bears not talking to each other, which is not a sound position for making investment decisions.

 

Stocks to Buy for Different Times

 In the WSJ weekly price chart, the fifth largest gainer was Healthcare. This is a sector heavily owned by institutions which has not seen many gains. Money-making opportunities look good considering the increasing amount of healthcare needed to be funded, independent of the cyclical economy for pharmaceuticals and health related services.

 

Once the economy bottoms Energy producing corporations will see demand rise, which should last for several years. One way to play this is through accounts + personal holdings in Berkshire Hathaway. (BRKA & BRKB will benefit from a large portfolio of petroleum stocks and ownership of operating utilities.)

 

We also serve investors who have multi-generational payments ahead of them. One of the few ways to play this is through stocks and funds invested in Africa and the Middle East. One of the classical ways to invest is to buy sectors under current price pressure. We think the Chinese region is well worth developing a long-term investment view.

 

Let’s Learn of Your Views.

 

 

 

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Mike Lipper's Blog: Our Wishes & Perspectives - Weekly Blog # 817

Mike Lipper's Blog: Dangers “Smart Money” & Thin Markets - Weekly Blog # 816

Mike Lipper's Blog: Searching For Answers - Weekly Blog # 815

 

 

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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.

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

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Perspectives Change With Your Viewpoint

Inside Out

I am writing this blog in the midst of the Blizzard of 2010. There is something almost universal in the northern climes of the Northern Hemisphere this year, as snow is disrupting travel plans and family functions in many parts of the US and Europe. At the moment, we are lucky, as all of our loved ones are with us or are snug in the homes of the family. Looking out the window from our well prepared homes, the falling snow has a pleasant and mystical glow about it. Our California grandchildren are visiting us and are thrilled, as this is quite a wondrous sight for them.

The very same gentle snow being whipped around by a significant wind is treacherous to travelers and unfortunately there will be many accidents, perhaps some loss of life. At best, the travelers and the various service people will be delayed and made uncomfortable. Looking at the falling snow, their perspective is very different than that from our comfortable place. Just as the difference from being snug at home versus being out in a blizzard changes one’s perspective of snow, an individual’s investment positions also change one’s view on the various markets being tossed around by the elements of supply and demand.

Which Direction is the Wind Blowing?

As the regular members of this blog community know, I am on record believing that the stock markets will challenge and probably exceed their old highs reached in 2007. I learned a long time ago one should never predict both the magnitude and the timing of a price move at the same time. Further, my initial prediction stated clearly that it is unlikely that the first assault on the old highs will be successful. Just as the size of the snow flakes and the speed and direction of the wind are important nuances in understanding the ultimate size of the snowfall and when it is likely to end, there are now nuances that are affecting my earlier market prediction.

The first concern is directed at the likelihood of a strong, sustained surge in the various stock markets. With each new bullish pronouncement by various pundits, the odds decrease on a quick 20%+ move. In the weather sense, all of these talking head comments create a vortex; they are chasing their own tails without providing much in the way of forward movement. They are successful in moving the snow from one snow bank to another, but not moving the storm out of the vicinity.

My second concern is continuing to follow the Barron’s Confidence Index. The index measures the ratio of the yields of high quality bonds to those of intermediate quality. When the index rises it is predicting with some degree of accuracy a rising stock market. Most of the time the index is flat with movement limited to a portion of a single basis point. While any week (and particularly a holiday-shortened week) can be an aberration, the recent decline of 1.4 makes me question the likely near term upward move of the market.

Are New Snow Plows Needed?

The final successful assault on an old high is often led by fresh troops, or if you will, leaders. As portfolios now contain domestic stocks that are not found within the lists of 30 (DJIA), 500 (S&P500) or 3000 (Russell), I tend to use the widest available list encapsulated in the Vanguard Total Stock Market Index fund. A large number of funds are beating this indicator as we are coming to the close of 2010, according to my old firm, now known as Lipper, Inc. According to its December 23d report, and focusing on each of the 20 US Diversified Equity fund averages, eight groups were superior to the higher standard of the total stock market index. (Ten investment objective fund averages gained more than that of the narrower S&P 500. The average Diversified Equity fund also beat the 500.) Perhaps more significantly, of the 20 sector categories, half were better. Normally new index highs are led by an over-weighted concentration of investments in the index. We may be slowly marshalling the strength of the leadership needed to breach the resistance likely to be found at the old high points.

Each week we look at the performance of the 25 largest SEC registered mutual funds. Using the same benchmark as we did above, only SPDR Gold fund gained more this year. As these 25 funds were the largest, they were the leaders of the fund business. Over the last five years 15 out of the 25 produced better results than the broadest measure. Following military tactics as I learned them, the final assault will rely on the big guns.

Currently, Small Capitalization Beats Large Capitalization

In looking at this year’s performance, it was the relative size of the market capitalization in the portfolios that led to the better performers. The best performers were the small caps, closely followed by the mid-caps and further down the line the multi-caps. On average, all three of the large cap categories, (growth, core and value) underperformed. The chances of a successful breach of the resistance at the former highs will, in my opinion, rest on large cap performance. In particular, leadership by large cap growth funds would set the tone for the sustained optimism required to bring most investors out of their snug homes.

In the Meantime

During market declines investors often make lists of stocks with attractive buy prices. My guess is that seldom do these lists get fully utilized. However, the technique can be applied now, probably with good effect. Many of us have portfolios embedded with significant unrealized capital gains. As mine do, these portfolios have a few or more holdings that are currently being held at a loss relative to purchase price. In general, I believe one’s entry level into a position is a historic accident when viewing future transactions. However, if you choose to continue to hold a losing position after a year of generally rising stock prices, you must believe that the loser will morph into a butterfly and fly up to the sky. If that is your view (or your handcuff), before year-end you should buy more of the loser. Next year you can choose to reduce your position after 31 days and lower your entry cost. I suspect that as we mount our move to higher levels, the sustained loss will have value to offset new gains. If you are not willing to buy more of an investment, particularly a losing one, shouldn’t you free up your capital for better uses?

These are my thoughts during the Blizzard of 2010.

May 2011 bring to you every bit of happiness you desire.
_____________________________________________
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