Diversification - Weekly Blog # 929

 

         

 

Mike Lipper’s Monday Morning Musings

 

Diversification

 

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

 

                                                                        

 

Preface

On a recent trip to London, Ruth and I attended a private fund and friend raising concert for the Academy of St. Martin’s in the Fields (ASMF), where Ruth is the first American trustee. The wonderful music was performed by Joshua Bell, the artistic director, and five other top-notch string musicians from the ASMF. Between the six talented musicians they played three different types of string instruments, alternating between lead and ensemble roles. The result was a successful combination of each of their talents.

 

Even when listening to a magnificent concert performance, I cannot forget my investment responsibilities. As individual musicians alternated from leading to supporting roles, it reminded me of what individual securities should do in a diversified long-term investment portfolio.

 

Application to Portfolio Management

In 1940 the SEC completed their depression-oriented reform rules. Among the last of these was the Investment Company Act of 1940, which unlike the other six regulations was not formed at their SEC headquarters. It was produced at the Mayflower Hotel in Washington by lawyers for the fund industry from Boston, New York (where the industry’s trade association was headquartered), Philadelphia, and Washington. Considering their recent experience of the market falling during the Depression, the mood of the meeting was to try reduce the chance of big future declines. The best model for that were state laws governing trust accounts, using generations of work by Boston and Philadelphia lawyers. (Even as late as the early 1960s a few Boston law firms had professional securities analysts on staff to assist in managing trust accounts.) Note, the main concern of the creators of fund regulation was the avoidance of losses. No word was spoken of making money on investments.

 

They thought the best way to reduce the chance of major losses was to limit an account’s exposure to any single investment. This led to limiting the percentage amount that funds could invest in any one stock, which usually meant no more than 5% of the voting stock at cost (not market). To this very day, most equity funds are labeled as diversified if they adhere to this principal.

 

The Problem with Voting Stock Limits

The biggest penalty paid by investors is not losses, but the absence of profits. Mutual Funds with long histories often make ten, twenty, or even more times as much on some of their holdings, which more than covers a small number of losses. Furthermore, great fortunes have been made, particularly over successive generations, in single stock portfolios or portfolios having a small number of investments.

 

For Professional Investors

The concept of risk management is critical but doing it by name or percentage of voting shares does not reduce risk, it may increase if all investments are exposed to a single concept. In the late nineteenth century professional investors considered concentration to be the best and safest way to invest. My college degree is from Columbia University, which had an endowment fully invested in railroad bonds and stocks, every single one file for bankruptcy. Today there is a risk that some participants in the “AI” surge could produce similar results by investing in too much in a good thing.

 

For publicly traded securities I suggest the biggest risks is with the stock owner and not the issuer, as they will be sellers of the stock before you do. Other risks include countries, technology, politics, and management. These can be identified as short-term and long-term factors. A possible short-term indicator is slightly more participants being bearish than bullish in the latest American Association of Individual Investors (AAII) survey of expectations for the next six months. Interestingly, the long-term indicator was Friday’s announcement by the Supreme Court, which ruled against the President’s authority to set tariffs using the International Emergency Economic Powers Act (IEEPA), which had very little to any impact on the market.

 

Bottom line, watch the musicians play and how well they work together, both with other musicians and staff, but also watch the reaction of the audience.

 

Understanding Going Global

In a recent conversation with a London-based fund manager, who in the past was almost completely invested in the US but now has a growing position in European stocks. While he has the biggest portion of his portfolio in US securities, he is very risk aware and expresses this by augmenting his portfolio with European stocks. Normally, he expects his US positions to outperform his European positions, but not in a declining market. In terms of P/E, Free Cash Flow, Dividend Yield, and other value measures, European stocks are less risky than US holdings.

 

 Another careful investor was Charlie Munger, who listed six principles to be avoided: High Financial Leverage, High Operating Leverage, Negative Cashflow, Poor Governance, High Risk of Obsolescence, No Competitive Advantage vs. a Strong Competitor.

 

Share your thoughts

                

 

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Anticipation Pays; Deliveries May Not - Weekly Blog # 907

 

 

 

Mike Lipper’s Monday Morning Musings

 

Anticipation Pays; Deliveries May Not

 

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

 

 

Since last December the bulls have been calling for a drop in the Fed interest rate. Some anticipated an interim pay-off near the close on Thursday when the last print on the 10-year yield failed to maintain its announcement high, fulfilling the dictum of selling on the news. The number of Friday’s declines on both the NYSE and NASDAQ were above the number of rising prices.

 

With the much-expected rate cut I found it interesting that the sample surveys of the American Association of Individual Investors (AAII) were bearish for the last three weeks. The six-month projections stayed in the 40% range for all three weeks (42.4%, 49.5%, and 43.4% respectively). In the latest week, which probably did not benefit from Thursday’s rate cut, the bullish estimate of 41.7% was slightly below the bearish call.

 

The explanation for the three main market indices rising to record levels from their April lows this week was the familiar “FOMO”, fear of missing out. I suspect traders sharing that impulse were largely housed in retail-oriented wealth management arms of brokerage firms and non-trust departments of banks.

 

The battle for investment survival is being waged by armies marching under the “FOMO” banner, as well as others withholding their purchase orders upon reading the economic data. There are two ammunition arsenals safeguarding the non-buyers, the declining number of job-openings and the rise of non-US traded equities benefiting from the fall of the US dollar. In April there were 158,000 jobs added, which fell to 22,000 in August. Barron’s shows the investment performance of 14 local markets in Europe and Asia each week. This week Europe had 4 risers and Asia 8. Asian and Emerging Market funds were most prominent among the better performing mutual funds this week.

 

On a longer-term basis there are a number of worries about investing in US markets:

1. The US market is becoming more speculative, with year-over-year NYSE share volume rising 16.24% and NASDAQ 68.97%.
2.  The current administration appears to want to reduce the independence of the Federal Reserve.
3. The President and SEC are floating the idea of switching from quarterly reporting to semiannual. Both ideas will make foreign-traded issues more attractive than they are now.
4. The drive to include non-publicly traded securities in retail accounts, particularly retirement portfolios, is expected to increase the risk of losses.
5. The London edition of the Financial Times devoted a full page to the headline “A new era of McCarthyism?”, showing a picture of President Trump and the late Senator McCarthy. This reminds me of sibling rivalry between an older brother and a successful younger brother. With a number of listed London exchange stocks moving to the US there is risk to a portion of the London market.

  

With the US stock market indices but not the average shares at record levels and the economy open to question, please be careful.

 

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“Hide & Seek” - Weekly Blog # 880

 

 

Mike Lipper’s Monday Morning Musings

 

“Hide & Seek”

 

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

 

                             

 

Friday’s Victory Signal?

After an extended period of stock price declines, prices shot up on Friday. The “Bulls” hoped it was the beginnings of a “V” shaped recovery, but some market analysts were skeptical. A strong move often ends when there is a 10 to 1 ratio between buyers and sellers, which was the case with Friday’s 10 to 1 ratio.

 

The Wall Street Journal publishes “Track the Markets: Winners and Losers” in their weekend edition. It tracks the moves of 72 index, currency, commodities, and ETFs weekly. It may be worth noting that only 35% rose for the week.

 

The Second Focus

The media, and therefore most of the public focus on daily price changes. Even with the growth of trading-oriented hedge funds and the conversion of former securities salespeople into fee-paid wealth managers, the portion of the assets invested in trading is less than the more sedate investment accounts invested long-term for retirement and similar institutional accounts. My focus is on the second type, which includes wealthy individuals.

 

The Current Administration is Ignoring Us

The first step in security analysis courses often starts with reading what the government puts out in order to develop a foundation for an investment policy. The current administration is the most transactional in memory. The President, Vice President, and Sectaries of Treasury and Commerce made and lost money on market price changes. This has forced me to find other sources to build our long-term investment philosophy.

 

Inevitable Recessions

Studying both recorded history and our own lives, it tells us that life does not move in straight lines, but in cycles of irregular frequencies and amplitudes. Simplistically, we can divide these movements into good and bad periods. However, an examination of the periods reveals differences in how each period affects us. The differences and how they affect us depends on where we begin each cycle, the magnitude and shape of the cycle, and any surprises along the way.

 

Both up and down cycles are caused by imbalances within their structures, which often occur due to other imbalances known or unknown. Most importantly, any study of cycles indicates they happen periodically and surprise most participants. Even with detailed histories of cycles they can be difficult to predict, although the root cause of most cycles is extreme human behavior.

 

While some cycles are caused by natural weather-related events, most economic cycles are caused by envy and/or too much debt. I am perfectly comfortable predicting a recession will hit us, but don’t know for sure when it will occur. (In a recent discussion with a small group of senior and/or semi-retired analysts, they felt there was a 65% chance of a recession within 12 months.)

 

The fundamental cause of cycles is often the result of people reaching for a better standard of living through excessive use of debt, which often results in a struggle to repay debt and interest. At some point the growing federal deficit, combined with growing consumer debt, as evidenced by credit card delinquencies, will force a decline in spending. Reduced spending will lower GDP and production. The fact or rumor of this happening is enough to bring securities prices down.

 

Confusing Hide and Seek

Hiding is not the solution to avoiding a loss of purchasing power, both actual and supposed. Cash is the only true defense, although it is not a defense against inflation which reduces the purchasing power of most assets. However, the biggest long-term loss from hiding is foregoing future potential high returns.

 

Our Approach

I believe a cash level no larger than one year’s essential spending should cover the crisis bottom. Most of the remaining capital should be devoted to seeking out substantial total returns that can produce multi-year gains.

 

Where are these Gems?

Bargains are usually hidden in plain sight. One example might have been the fourth quarter 2024 purchase of European equities, which were priced for a European recession. However, European equities actually generated expanded earnings from Southeast Asia, Latin America, and Africa. (In a recent discussion with one of the largest investment advisers negative on investing in Europe. Their views were based on their continent’s own economics, while paying insufficient attention to companies growing profitably in the aforementioned regions)

 

Thus far in the first quarter I have been lucky enough to own both SEC registered mutual funds and European-based global issuers. (It took patience because earlier performance periods were not good.) This shows the need to be courageous when seeking future bargains. 

 

We would appreciate learning your views.

 

 

 

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This Was the Week That Was, But Not What Was Expected - Weekly Blog # 861

 

Mike Lipper’s Monday Morning Musings

 

This Was The Week That Was,

But Not What Was Expected

 

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

 

 

 

 “Trump Trade”, An Artifact of History

No one really knows which of the new administration’s critical rules and regulations will become law. Both presidential candidates have announced and unannounced wishes, but both are unlikely to get another term. They will have little ability to help various members of Congress win the ’26 or ’28 elections.

 

Unless there is a one-sided sweep of both Houses for the same party, the odds favor majorities in the single digits. While the rest of the world might think Congressional leaders will be able to command political discipline, both parties are split into multiple groups depending on the particular issue. Furthermore, in the Senate there are members who see themselves sitting in the White House after the ’28 elections.  Looking beyond the intramural games of the next four years, there are two elements of news that should be of importance to those of us selecting assets to meet the needs of longer-term investors.

 

The Declining Dollar

The CFA Institute Research & Policy Center conducted a global survey of 4000 CFAs concerning the future value of the US Dollar. The survey was conducted from 15 to 31 of July 2024. They published their findings in a white paper titled “The Dollar’s Exorbitant Privilege” (This is what the French President called the dollar years ago.)

 

A supermajority of respondents believe that US government spending is not sustainable. Only 59% of US Treasury investors believe the US can continue to borrow using Treasuries. (I remember there was a time when we created a special class of Treasuries for the Saudi Arabia, with an undisclosed interest rate). Neither of the two Presidential Candidates have announced any plans to reduce the deficit and both are unannounced pro-inflation. The respondents expect the dollar to be replaced by a multipolar currency system no later than fifteen years from now.

 

Some investors already recognize the risk in the dollar. Bank of America’s brokerage firm noted this week that 31% of their volume was in gold and 24% in crypto, as a way to reduce total dependence on the dollar. One long-term investor diversifying his currency risk is Warren Buffett. After doubling his money in five Japanese Trading companies, he is now borrowing money in Yen.

 

Berkshire Hathaway’s 10Q

As a young analyst I became enamored by their financial statements, long before I could afford to buy shares in Berkshire. In the 1960s I felt a smart business school could devote a whole semester to reading and understanding the financial reports of Berkshire. It would teach students about equity investments, bonds, insurance, commodities, management analysis, and how politics impacts investment decisions. (It might even help the professors learn about the real world)

 

On Saturday Berkshire published its third quarter results with a relatively concise press release, which was top-line oriented. As is required by the SEC it also published its 10Q document, which was over fifty pages long. Ten of those pages were full of brief comments on each of the larger investments. This is what hooked me, although I could not purchase most of their investments because they are not publicly traded. Their comments were in some detail, covering sales, earnings, taxes paid, expense trends, and management issues. The comments gave me an understanding of how the real economy is working. (Along the way I was able to become comfortable enough to buy some shares in Berkshire, and it is now my biggest investment.)

 

The latest “Q” showed that in nine months they had raised their cash levels to $288 billion, compared to $130 billion at year-end.  At the same time, they added $50 billion to investments. Perhaps most significant was that they did not repurchase any of their own publicly traded stock. A couple of years ago at a private dinner with the late and great Charley Munger, I asked him if I should value their private companies at twice their carrying value (purchase price + dividends received). Charley counseled me that everything they owned currently was not a good investment. As usual he was correct. In this quarter’s “Q” there were a significant number of investments that declining earnings or lost money. (I still believe they own enough large winners on average where doubling their holdings value would be reasonable.) If one looks at the operations of a number of industrial and consumer product entities, they themselves conduct substantial financial activities in terms of loans and insurance.

 

Is Warren Buffett’s Caution Warranted?

Some stocks have risen so high that they may have brought some gains forward, potentially reducing future gains. One way to evaluate this is to look at the gains achieved by the leading mutual fund sectors: Total Return Performance for the latest 52 weeks are shown below:

 

Equity Leverage       61.16%

Financial Services    46.38%

Science & Tech        44.13%

Mid-Cap Growth        41.28%

Large-Cap Growth      40.30%

 

I don’t expect all to be leaders in the next 52 weeks, as the three main indices (DJIA, SPX, and the Nasdaq Composite) have “Head & Shoulders” chart patterns, which often leads to a reversal.

 

Question: What Do You Think?

 

 

 

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Implications from 2 different markets - Weekly Blog # 854

 

Mike Lipper’s Monday Morning Musings

 

Implications from 2 different markets

 

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

 

 

 

On balance the New York Stock Exchange (NYSE) and NASDAQ stocks serve very different investors, as they have different outlooks and current performances. The “Big Board” stocks tend to be older, larger capitalization, have greater media exposure and get more attention from Washington. They are likely to populate brokerage accounts managed or influenced by former commission generators who have since converted to being fee paid advisors. The NYSE also services institutional accounts with substantial capital with limited research and trading professionals, which generally appeals to older clients.

 

Those in Washington and “news” rooms may not be aware that the NASDAQ is home to 4627 stocks vs 2903 for the NYSE, as of this week. In recent years the NASDAQ composite has materially outperformed the NYSE stocks, often identified as the 30 stocks in the Dow Jones Industrial Average (DJIA).

 

NASDAQ stocks are often more volatile than those traded on the NYSE, because they are smaller and have fewer liquidity providers. This may be the reason why those without trading experience shy away, resulting in more block trades and 3-5 times more NASDAQ volume.

 

Many people confuse the NASDAQ with its Over The Counter (OTC) origin. The NASDAQ is a regulated stock exchange, distinct from the OTC market which is held together by the pink and yellow sheets publishing the competing bid and asked spreads of competing dealers. Since its earlier days, important constituents of the NASDAQ have consisted of local companies, medium size banks, and some foreign stocks.

 

While the NYSE focused on its regulatory responsibilities, the NASDAQ grew through an extensive marketing effort. This marketing effort happened at a time when a large number of what we now call “Tech Companies” were looking to find a trading home. These tech companies joined the NASDAQ exchange, attracting younger, more aggressive, professional investors and traders.

 

Implications

Trying to determine the future is impossible, but military intelligence (an oxymoronic term) attempts to do this by gathering separate elements of information to see if they provide a pathway to one of many futures. This is the approach I take in thinking about the future. While most pundits focus on present price relations, I don’t find them particularly useful. We need to guess what future prices will be for specific future periods.

 

In the short run the following inputs may be relevant:

1. This week’s high/low prices were 548/168 for the NYSE vs 411/393 for the NASDAQ (Enthusiasm/Caution)
2. Friday’s percentage of advances were 85% for the NYSE vs 68% for the NASDAQ (Winners are less happy)
3. The weekly AAII bearish sentiment increased to 31% from 25% the prior week.
4. Financial Services shorts as a percentage of float saw Franklin Resources* at 8.5%, FactSet at 6.0%, T. Rowe Price* at 4.6%, Raymond James* at 4.2%, Regional Financial at 4.1%, and the sector at 1.9%. (*held in personal accounts, unhappy          near-term)
5. Ruth’s indicator, the size of the Vogue September issue, is the biggest month for high fashion advertising, perhaps like the lipstick indicator. (The closing of Western shops in China is further proof of the expected global recession, or worse.)

 

Longer-Term Indicators

1. The White House is preparing to introduce a Corporate Alternative Minimum Tax (CAMT) of 15%, which is unlikely to pass the next Congress.
2. Both Presidential candidates are pro inflation in action, if not in words.
3. A front-page WSJ article titled “As Berkshire Hathaway* Rallies, Its Looking Too Rich to Some”, is an example of poor research. Warren Buffett has repeatably stated that he is not running the company for the present shareholders, but for their heirs, which is far beyond his 93 years. To my mind, the GAAP published numbers are misleading considering the SEC’s regulations. The value of a stock is an elusive intrinsic number. The most difficult part is the private value or current price of the 60 odd companies Berkshire owns, which are carried at purchase price plus dividends paid to Berkshire. To the right buyer, the aggregate eventual price for these companies is worth a multiple of their carrying value. (“Intrinsic Value” was a concept that I learned from Professor David Dodd, who authored “Security Analysis” with Ben Graham. This is probably the reason I and some of my accounts own the stock. We own the stock for its eventual value to our family.)
4. The world is in stages of a slowdown or a recession, with both the US and China suffering. Always treating China as an adversary inhibits our access to the Chinese market and their skills, preventing us from reaching our potential. (I don’t have a suggestion on how to conduct this rescue effort. It is like training a dangerous animal).                                                                                                                                         

 

Conclusions:

There will always be bear markets, which often precede recessions and infrequent depressions. Since we haven’t had a recession in a long time, one is likely coming. Particularly considering the political class’s stock optioned business management and the gift of a highly valued dollar compared to other deficit currencies.

 

The key question at the moment is when we will see the next INCREASE in INTEREST RATES and INCOME TAX RATES, which the Fed will follow.

 

Key Question: What is Your Bet as to When?

 

 

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What I See and Perceive By Observing - Weekly Blog # 844

 

 

 

Mike Lipper’s Monday Morning Musings

 

What I See and Perceive By Observing

 

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

 

             

Often One Finds it is Difficult to Predict the Future 

I Currently find it particularly hard to predict the size and timing of the next recession. Economic news is sharply split between enthusiastic believers from discredited pundits and concerned business owners joined by the buying public. The index bulls currently appear to be winners over those focused on the near-term future, expressed through layoffs and a shift to more thrifty purchasing. 

 

During periods like this I find it useful to seek guidance from those far away from the worlds of economics and finance. Yoggi Berra was one of the most successful baseball catchers and later became a good manager of teams. He had a unique perspective derived from crouching behind home plate. One of his more well-known quotes is “You can observe a lot by just watching”. Using this mantra, the following observations may be useful. 

 

From the World of Numbers 

1. On Friday there was a significant difference between the percentage of rising and falling stocks on the two major US stock markets. Only 39% rose on the NYSE, while 63% rose on the NASDAQ. (This may indicate investors prefer shorter-term shares that are more speculative.) 
2. Extending the observations to a slightly longer period of a four-day trading week and shifting to prices, one get more balanced results. Fifty percent of the stocks on the “Big Board” rose, while 45% rose on the NASDAQ. (This shows that the general market is pretty much in balance.) 
3. Going out to a six-month outlook for the remaining half-year, the weekly AAII sample survey indicates an even more bullish than bearish bias, 41.7% vs. 2.6% respectively. It’s interesting that both indicators declined from the prior week by almost the same amount, 2.8% vs 2.2%. This is likely caused by a different group in the sample survey dominating. 
4. In looking at the list of equity funds that beat the performance of the S&P 500 in the first half. The three leaders were Fidelity Contrafund +25.6%, Vanguard Growth Index ETF +20.51%, and American Funds Growth Fund of America +16.80%. These three funds represent some of the oldest fund management companies and are the largest funds in the equity business. They also have three very distinct ways of managing money. Fidelity Contra is managed by a single manager and has wide latitude in terms of stock selection, with a turnover rate of 16 %. Vanguard Growth Index ETF has a very low turnover of 5% and Growth Fund of America has a turnover rate of 25%, which is below average.  Growth Fund of America is managed by a number of portfolio managers and the research department. (This demonstrates that there are several ways to perform well. The calculation of turnover is required by the SEC, which takes the smaller of sales over purchases divided by monthly average of total assets. The SEC was interested in identifying management churning the portfolio to generate commissions, so they only used the smaller of the two numbers. Thus, the real turnover is at least double the published turnover.)    

 

Observations in terms of People  

1. This is the year of elections, and the pundits are focusing their analysis on policies, which leads to inaccurate observations. The key is looking at the policies of the losers, not the winners, which is mostly the party now in power. In my opinion the losers failed to execute the solution to problems. One of the slogans ending Tammany Hall’s reign in New York was “Throw the Bums Out”, which is alive and well today against the “political class”. 
2. The media creates the experts they want to quote. The Wall Street Journal (WSJ) recently announced the last “bear” has left Wall Street, referring to Marko Kolanovic leaving JP Morgan. When I first read the headline, I expected to read about Jaime Dimon, the CEO of the most powerful bank in the US, if not the world. JP Morgan is a stock I own. In last week’s blog I mentioned the number of leaders of both commercial and industrial firms that have been preparing for the next recession for some time. (In predicting a recession, the exact date of the beginning should be separated from the probability and timing of the event.) 

 

 

Please share Your Thoughts 

         

 

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Avoiding Many Mistakes - Weekly Blog # 834

 

         

Mike Lipper’s Monday Morning Musings

 

Avoiding Many Mistakes

 

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

   

       

Numbers Are Not the Answer, Questions Are

This is the season of the year when investment managers are often chosen. This is particularly true now, with US stock market leadership evolving. There is a debate between the short-term attraction of growth and fundamental long-term concerns over the global economy and political structure. We may have entered the early stage of replacing current leadership in business and in Washington. Because the future appears uncertain, group decisions through committee are more likely. (A historic lesson from military and political history is the larger the group, the less dynamic the decision.)

 

The first step in making an investment discussion is often to gather the easily available numbers. The first problem with gathering numbers is the motivation of the sources. In the investment arena, the major providers are groups who wish to publish data for direct or indirect sale and/or profit. Another source is regulators who wish to provide standards leading to evidence for lawsuits. Neither of these sources try to help others make wise investment decisions.

 

At this point in my professional life and practice, I am trying to make informed and correct investment decisions for specific users, including my family and myself. The following discussion are some of the indicia I use to ask some of the right questions.

 

Critical Questions in Search for Profitable Investments

1. Rarely the first question and more likely the last, is understanding the motivation of important individuals involved on a personal and group basis. Different answers should be expected depending on whether the mindset is one of a publicly traded investor or a sole ownership, and all gradations in between.
2. Obtain quarterly performance since inception for at least ten years, or shorter if there was a significant change of individuals or operating philosophy.
3. Understand the choice of perceived peers and their performance for the period where their critical philosophy and personnel were in place.
4. Get the percentage of time the investment occupies in each quintile. If potential investors are satisfied with mid-quintile performance, eliminate all candidates who don’t have 75% of their results in the 3^rd quintile. If the account is a significant turnaround buyer, focus on managers with 25-50% in the 4^th and 5^th quintile. (This is based on the reaction of many investors to the pain of losing, which is felt twice as much as gaining an equal amount. If the pain multiple is higher e.g. 4x, the loss tolerance level will be lower, perhaps as low as 13% or in the range of only five quarters out of 50.) If the buyer insists on avoiding problems, screen for a manager that has performance primarily in the second quintile, but no more than 25% in top quintile.)
5. Voting members of the committee, are they making choices or reaffirming choices made?
6. How important are inputs from marketing/sales and trading? Who are the top 10 brokers and top 10 marketers for the organization?
7. Recalculate the published turnover of the portfolio to include the greater of sales & purchases. (The SEC mandated measure is based on the smaller, because of their concern for “churning”. Identify the major sources of inflow and withdrawals? From the portfolio perspective, how much of sales is replacement of positions and how much stems from disappointments?
8. What are the management responsibilities of the portfolio manager and who does he/she report to? Can he describe his personal and major family portfolios?

 

Items of Interest you may have missed.

1. Daniel Henninger wrote a column in Thursday’s WSJ titled “The Counter-Revolt Begins”. He lists a number of instances where decidedly left leaning communities have passed local regulations and laws to bring back some safety to their cities and states. These include San Francisco, Los Angeles, the District of Columbia, and the states of Oregon and New York. Wealthy university donors are also insisting on changes.
2. The global financial community is consolidating as intra-industry acquisitions occur. Computershare is buying BNY Trust Company of Canada. Several top financial advisors at JP Morgan also left in a single day.
3. PGIM of Prudential is following the trend and has applied to the SEC for a new class of Exchange Traded Fund shares for their mutual funds. They are following DFA, Morgan Stanley, and Fidelity. (This may bring more money into the ETF industry. It answers one of my concerns for redeeming ETFs in thin markets.  A surge in bond and small-cap redemptions on a crisis day can be helped by accessing the open-end fund’s resources. Until Vanguard’s patent protection expired, it was the only fund group that could do this.
4. All 32 global equity market indices rose this week.
5. AAII publishes bullish, bearish, and neutral indices from a sample survey of their members market views six-months out. They show rare confusion in the retail market this week, where all three numbers were in the 32-33 range.
6. Also, Copper prices are often referred to as Dr Copper because the metal is used in so many products. Copper has been used as a type of currency in some countries with limited or expensive markets for dollars. This week’s copper prices were near an all-time high.

 

As always, I am searching for good thoughts from bright people such as you.   

 

 

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The Course to Explain Last Week - Weekly Blog # 787

 

Mike Lipper’s Monday Morning Musings

The Course to Explain Last Week

 

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

  

 

 

Understanding Your Location

Almost all the news events of the last week are better understood if you appreciate the critical functions created by geography. At one time a whole course on geography was part of an early primary education, followed by a course on economic geography in middle school. These courses were pushed out to make room for social topics better fitting the educational establishment’s political views. No wonder so many of the current population were misled by the actions last week.

 

Where the Cities Are?

As populations grew, many benefitted from the values offered by schooling, medical services, education, entertainment, and political practices in towns and cities. Early cities were mostly found around strategic waterways, oceans, seas, lakes, and rivers. It’s no coincidence downtown locations attracted merchants and others. For hundreds of years financial and merchandise centers grew up around seaports such as New York, Boston, London, and Tokyo. To this day, the largest city in most countries and states remain these centers. Not surprisingly, to counterbalance the political powers of these cities, some political forces established state and national government sites away from the commercial centers e.g., Albany, Annapolis, Brasilia, Canberra, Sacramento, and Washington D.C.

 

We are all aware The President of the United States compromised and signed legislation into law on Saturday. He temporarily raised the debt limit and modified the growth and make up of appropriations. The result was only possible because DC has a different power currency than the dollar-based currency driving the rest of the country.

 

The power currency as exercised on Capitol Hill represents votes in the Senate and House, with the occasional interaction of the Presidency and Supreme Court. If their currency was in the commercial world, it would have been fairly easy to measure the dollars to be spent or not to be spent. This weekend both the Democrats and Republicans are claiming great victories. The problem is that the math is questionable, as are the policing impacts on the agreements. Regardless of the academic debate, the value of the concessions were too small.

 

There will possibly be a longer lasting victory benefiting society in the future, as these bills were passed by votes from “centralists” on both sides who resisted the impassioned pleas from the extreme members of their parties. We can build on the small progress made this week to make larger changes in the future, as long as those in the center learn to trust and respect the centrist members of the other party. While I have not done the analysis, my guess is that most who voted to pass these bills came from commercial backgrounds and are used to working to get compromises.

 

A Much Bigger Issue Was Not Discussed

Whether we like it or not, we are all globalists. Most of the threads in our clothes and some of our favorite foods come from overseas. The producers of these goods, as well as the militaries of our allies are paid in US dollars to protect us. We also sell a lot of our products and services to them. The US represents roughly ¼ of world trade. Problem is, the US dollar is the medium of exchange for ½ to 90% of currency exchanges depending on how you measure it. The US dollar is currently the most trusted currency. This translates into the lowest cost to buy products and services relative to other currencies who must pay a premium for the same purchases. This is an extraordinary privilege.

 

The privilege is not granted by an authority, but by the perceived purchasing power of the dollar through a collection of transactions each minute of each day. In general, it is assumed the relative purchasing power is stable compared to other currencies.

 

Perceptions are normally slow to change, but they can move at the speed of communication through transactors in a 24-hour marketplace. In a microcosm of how the market can work, examine the run on the SVB. Most of the loans and deposits were from the “silicon-valley” venture-oriented community. Many of these companies had critical shareholders who were active participants in the community, something the bank and regulators did not fully appreciate. I suspect the run on that bank was started by a few comments within this high-pressure group. The daily foreign-exchange community is much, much larger than SVB’s critical players, although it could follow the same communication, concentration, and contagion pattern. (There is no single Federal Reserve Bank for currencies.)

 

Possible Causes

Most powerful trends initially move at glacial speeds, until they take-off in hypersonic movements. The slow deterioration essentially reflects a slow growing decline in confidence and is often a collection of small actions. Some examples are listed below:

• A poorly executed withdrawal from Afghanistan by more isolationist new leadership.
• A shared belief that China permitted COVID to escape.
• Domestic pump priming and an unwise explosion of cash generation, unleashing inflation on the world.
• A weak response to a border war, with the inability to rapidly supply US Tanks and F-16 planes for coming offensive in Ukraine.
• In addition to government management problems, US industry leaders like JP Morgan, Goldman Sachs, Apple, and even the SEC, have had management issues that led to public errors. These are not confidence builders.

 

Barron’s Suggest Another Concern

In a four-page article in this week’s Barron’s they suggest loosely regulated non-bank financial organizations could have surprising credit issues. If you add up all the credit and equity extended to individuals, businesses, and organizations, it is about equal in size to the assets/liabilities of the regulated banks. Insurance companies, retirement plans, private capital providers, family offices, investment advisers, and brokerage firms have some narrow regulatory oversight. However, there is no single body reviewing the impact of bailout capital on the broader global economy.

 

I am not sure I want to see a super-agency overseeing the non-bank financial sector. However, it might be useful to have coordinated data collection and similar transaction management principles.

 

Conclusion:

I am unclear as to what the intermediate future will look like and appreciate any thoughts.

 

 

 

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Mike Lipper's Blog: TOO MANY HISTORIC LESSONS - Weekly Blog # 786

Mike Lipper's Blog: Statistics vs. Influences-Analysts vs. AI - Weekly Blog # 785

Mike Lipper's Blog: Insights From a Sleepy Week, Important? - Weekly Blog # 784

 

 

 

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Contact author for limited redistribution permission.