Searching for Future Long-Term Picks: Gathering Assets, Reasons to Search - Weekly Blog # 948

 

 

 

Mike Lipper’s Monday Morning Musings

 

Searching for Future Long-Term Picks:

Gathering Assets, Reasons to Search

 

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

 

          

 

 

Inputs from This Week

1. The Consumer Confidence Index was 91.4 vs the 94.4 expected. The index was however up from last month’s 90.6.
2. The American Association of Individual Investors (AAII) sample survey projections for next six months are Bullish 31.4% vs the prior week’s 42.3%, Bearish 42.3% vs the prior week’s 36.3%.
3. Workforce participation of 61.4% is the lowest since the covid readings. (We have made working on payroll unattractive for some.)
4. In some European countries the number of air conditioners is small, and some are even being removed. (The founder of modern Singapore stated that the installation of “AC” led to the economic growth, enabling it to become the fifth richest economy in the world.)

 

Future Investment Problems

1. Americans misreading foreign data. The foreign performance of indices and positions is converted into US dollars from the local currency. As the US dollar is currently stronger than most other currencies, it makes foreign investments look more attractive. We tend to forget that most US investors temporarily rent foreign securities. When we sell in declining markets local buyers are often the only buyers and they are not generous.
2. When looking at the statics of a company, investors look at where the fiscal headquarters of the company is located, not where the product or service is sold. Consequently, many investors currently think they are investing in the UK, Taiwan, or South Korea. The Financial Times 100 largest companies, which dominate the local British stock market, makes almost none of its operating earnings are earned in the UK. It is my guess that a good many US investors think their rapidly expanding earnings are coming from South Korea and Taiwan, not by what is happening in the US.
3. Investors are often attracted to various securities indices due to a handful of the leading performing issues within the index. These companies, at least for a while, perform better than the indices. However, history tells us that it is only a matter of time before the leaders become laggards and detract from the performance of the index.
4. One recent concern of mine is that a senior American General in Europe is resigning. He is a four-star general with a very good battle record. I don’t believe it is an appropriate time to reduce our military leadership anywhere, particularly in Europe.
5. As a portfolio manager for long-term beneficiaries, I am very conscious of the variability of performance records. Looking at the recent five-year period, only six mutual fund sectors had average performance better than the S&P 500 Index Funds average. For the ten-year period, only Large-Cap Growth Funds and Domestic and Global Science and Technology Funds beat the S&P 500 Index Funds average. Considering the CEOs of many companies don’t last beyond five years, with even fewer lasting ten years, I am particularly nervous about those whose stock prices depend on “AI” products and services. (I wonder how many repeat orders there are for their present products and services.) Many of last year’s leaders are selling below last year’s performance ranks.

 

Possible Buys

The one major stock group selling below its 2000 price is Healthcare. I do not know these stocks well and tend to use specialty funds to invest in the sector. I will probably reach sell decisions without much help from the industry, but that may be a long time from now. Without a lot of knowledge, I am starting my learning efforts with Johnson & Johnson and CVS Health. I like their strategies but don’t know their tactics, managements, and their outlooks for their critical present and future drugs. Furthermore, I don’t know the outlook for government regulation. I need any help subscribers can provide.  

                                         

US Gifts to Others

Those in the US are incredibly lucky, or if you prefer God Given, considering the benefits/gifts we have received. However, it is wise to note that some of what we have given to the rest of the world is not always beneficial, as shown below:

1. A constitution that enshrines the rights of minorities.
2. An education process that attracts students from all over the world, who return to their homelands and contribute to them.
3. A military power that has critically helped defend other countries.
4. Innovation, which has produced great things for the world. 

 

Hope you had a good July 4th and life gets better.

 

 

 

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

Mike Lipper's Blog: What is Pending and When - Weekly Blog # 947

Mike Lipper's Blog: Too Many Short-Term Worries To Pick Long-Term Winners - Weekly Blog # 946

Mike Lipper's Blog: Is This the Last Hurrah? - Weekly Blog # 945

 

 

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US Stock Markets New Highs Misleading? - Weekly Blog # 585

Mike Lipper’s Monday Morning Musings

US Stock Markets New Highs Misleading?

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

On Friday, July 12th, the three main indices for the US Stock markets rose in price to new highs. Historically, when markets rise to new highs,  people treat it as a reason to believe that further advances should be expected, unless that high marks the peak for some time. Because trading volume was lackluster, these highs were probably not the peak, but that could be misleading. (These are not political views.)

Performance Reviews
The gains achieved so far in 2019 may themselves qualify as a bull market, when measured from the lows suffered in January:

Dow Jones Industrial Average +20%
S&P 500 +23%
NASDAQ Composite +28%

Note, the NASDAQ led the other indices and was in many ways the leader of the market. Relative to the other measures the NASDAQ is much more technology oriented and also has a significant number of smaller banks and financials. It also includes a larger number of companies which are not profitable.

Market analysts have two other statistics they use to gauge the strength of markets and their sectors. The first is the number of stocks advancing versus declining. In last week’s trading there was a material difference, as shown below:

Market  # Price Advances  # Price Declines
NYSE          1683              1384
NASDAQ        1463              1836

Perhaps the greater number of declines in the NASDAQ was the result of it self-correcting . The smaller NASDAQ companies are generally more attuned to their domestic customers’ views and while revenues remain strong for most companies, some of their customers may be showing some nervousness about the months ahead.

The second set of numbers that market analysts review is the number of new highs vs. new lows, as shown below:

Market     # New Highs      # of New Lows
NYSE           449                87
NASDAQ         284               142

Many investors believe that most transactions these days are directed by trading-oriented groups, particularly Exchange Traded Funds and Exchange Traded Securities, most of which are listed on the New York Stock Exchange. Thus, traders of one kind or another are more important than long-term investors in terms of market impact. Consequently, current market moves are more likely to represent short-term thinking than long-term.

N.B. Disclosure - I was an electronic member of the New York Stock Exchange and a member of NASDAQ. Both the financial services fund that I manage and my personal accounts own shares in NASDAQ.

Other Indicators

• Mutual Funds – 15 (60%) of the top 25 performing mutual funds for the week were invested outside of the mainstream of the US stock market. The bulk being in energy, commodities, Latin America, and other natural resources, including precious metals. These bets are anticipating a change from the immediate past, where technology and consumer products drove the US stock market.
• Below Investment Grade Bond Credit Ratings - A cut in the ratings of any credits in this class has a price impact on most of the vehicles that are below investment grade.
• Singapore – Historically viewed as the investment jewel of the orient, their economy contracted for the second consecutive quarter. Singapore and South Korea are both being impacted by global trade tensions. However, because of their talent and government focus, I believe they will come out stronger after restructuring. Consequently, this current period could be viewed as an opportunity for long-term global investors.

Increasing Volatility
We have gotten used to measuring daily volatility in terms of price points and considering the high levels of the market indices and many stock prices, volatility is currently considered high. However, if measured in percentage terms it would be considered low to normal. Intra-day volatility should be measured from high to low, in order to show the intra-day spread. More importantly, in looking at the Congressional Budget Office’s study titled “The Distribution of Household Income, 2016”, I expect personal income volatility for all is expected to rise. This is due to federal tax changes and changes at the state and municipal levels. (These studies don’t track sales and use taxes instead. They are likely to rise with various models of VAT imposed.) In addition, as we restructure the global workplace more people are likely to get more variable pay, rather than the mostly fixed pay they get today. For many it will result in a pay increase, but it will also likely result in an increase in anxiety. Contingency savings should go up, but probably won’t.

Investment Conclusions:

1. The markets are changing in response to shifting global economic movements.
2. There is an increased need for broad diversification to manage the impact of surprises.
3. Change is the name for the arena of Opportunity.

Questions for the week:

1. What significance do you attach to the new US market highs?
2. What major changes do you expect to impact your portfolio?
3. For what changes should your Children and Grandchildren be prepared? 

   
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/07/twin-problems-not-enough-greed-and-too.html

https://mikelipper.blogspot.com/2019/06/reduce-investment-mistakes-with-deeper.html

https://mikelipper.blogspot.com/2019/06/our-investment-mistake-is-in-labeling.html



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Cyclical and Secular Concerns Vary with Time Horizons - Weekly Blog # 490

Introduction

“Horses for Course” is a racing expression which indicates that horses run differently at different racetracks. Not only different courses but different lengths of race. As is often the case, what is true in the analysis (or handicapping) at the track is also true in the selection of managers, securities, and investment strategies. These concepts were the genesis of my developing different timespans to be used for managing investment portfolios.

In the first two timespans, Operating and Replenishment, significant financial losses are difficult to overcome and thus cyclical considerations dominate. The longer term Endowment and Legacy portfolios assume periodic declines, but that long-term secular trends will dictate their future performance.

As we appear to be entering a period of switching gears from complacency or frozen in place, to one of growing enthusiasm, the prudent investor should increasingly wonder what could go wrong. Of the myriad of possible future events it is unlikely that one can accurately predict what will happen. At the current time I feel an obligation to point out possible unanticipated problems.

I will first focus on possible cyclical problems that can impact investment performance through an intermediary period of roughly five years and thus cyclical factors. In the second part of today’s blog I will focus on Asian, African, and Latin American factors that could impact the longer term secular trends.

Cyclical Factors for the Intermediate Term

As Professor Robert Shiller points out, almost everyone acknowledges that a recession will happen. He further states at the moment that not too many investors are concerned about a future recession. The popular securities indices are regularly reporting new high levels. However, the best performing of the three indices, Dow Jones Industrial Average (DJIA), Standard & Poor’s 500 (S&P500) and the NASDAQ Composite (NASDAQ) is the last one by a considerable margin, as small companies particularly those involved with information technology including Apple^* performed well. While the NASDAQ is slightly reporting new highs, it is not demonstrating a major breakout after hitting a new high and thus it may be questioning the strength of the move. This is not particularly upsetting because as in the past, Apple shares sell off after new product announcement run ups. As a long-term owner of these shares I am much more focused to see the level of sales and deliveries in its fiscal second quarter ending in March 2018. While some market rotation is healthy if it does not include a strong NASDAQ performance, it would be demonstrating the “animal spirits” are getting tired.

^*Held personally

Market leadership rotation is normal and expected, but when one or more of five sectors or asset classes lead, it will be an indication that investors are deserting the central forces of the economy. If you possess trading skills the five sectors could be very productive. If you are like the most of us who move in and out late, be very careful. The five in alphabetical order are Bonds, Commodities, Energy, Gold, and TIPS. If you are an accomplished player, play. If not it would be time to build reserves, particularly if you are managing a current or replenishment account.

As mentioned last week the gains in earnings being reported for the first half of 2017 are due to expanding profit margins. Earnings per share are growing faster than revenues which are growing slowly and in some cases very slowly in the second quarter. To create sustainable earnings and employment we need to see revenue generation pick up.

The potential expansion in the level of enthusiasm for stocks may be heralded by the decline in neutral sentiment in the latest AAII survey, dropping from 36.7% last week to 32.7% this week, and a roughly similar increase in bearish attitudes. This suggests to me we can see an important increase in volume which in and itself engenders more volatility.

My real concern for the intermediate future centers around the bond market which is larger than the stock market but can be much more sensitive to short-term events. I don’t know what can create a bond market bear market, but the following are thoughts that needs to be understood:

·       The little understood bank for central banks, the Bank for International Settlements, has noted that many governments, including the US, are only identifying contingent liabilities in their financial statements. These include unfounded pension and medical costs. One potential concern of mine is a large size of unprofitable investments by China in building its One Belt One Road Initiative (OBORI) in neighboring and other Asian countries.

·       Yields on high grade corporate bonds are rising which means prices are falling slightly, showing some lack of demand. At the same time yields on lesser quality bonds are holding up, showing an increase in demand.

·       Just as yields go in the opposite direction, the contrarian in me suggests that flows follow performance late and stay too long. In almost every country that has a mutual fund business there is an increase of substantial size in the flow into bonds. They are easy to sell to people in view of the low manipulated rates dictated by central banks that impact commercial banks’ deposit rates. This excessive flow is augmented by the large number of financial groups offering new credit funds without sufficient experience in non-bank lending.

In sum, I grow increasingly wary in crowded markets.

For the intermediate term investor I see more performance/career risk than we have seen in sometime. Perhaps, we will escape but by the next US Presidential Election the odds are that we are going to be tested.

Secular Concerns for Longer Term Investing

For only long-term investors to consider in their third (Endowment Timespan) and their fourth (Legacy Timespan) portfolios are some surprising inputs from a two day visit to Mumbai, India. To fulfill two speaking engagements at a very busy time of year, my wife and I flew into Mumbai Thursday night and left on a redeye Saturday night. The purpose of the two speeches was to have discussions with Indian mutual fund CEOs, portfolio managers, independent investment advisors and distributors of funds. There are forty fund houses with thirty four reporting their net asset value in the paper. I made the point that they have only penetrated 3% of the households where in the US the penetration is over 40%. In addition to focusing on mutual funds, I had hoped to find some good long-term investments for our family accounts. I knew it to be a long shot in that the Indian stock market for the year to date is the best performing large country market. I was impressed with the quality of the Indian professionals that inhabit their market and compete with a relatively small number of foreign funds that are devoted to investing in India.

As with many adventures and experiments, there are surprises generating from some disappointments in the initial objectives. On Saturdays there are two major financial newspapers published in India, (The Economic Times and Financial Express) which have articles of interest that could impact future investing in India, China, Africa, Latin America and other Emerging Markets.

The following are briefs from the points of views expressed without any additional research or separate opinion from this traveler:

“Africa Sees India as Key Growth Partner” is the title to an article that contrasts with the way India is viewed as compared with China as a source of development spending. According to the article "Recent media reports have carried allegations that Chinese business houses are treating African workers as slaves...." India on the other hand is viewed as a collaborator with the locals. The article mentions an Indian-Japan-Asia-African Growth corridor as an alternative to China's One Belt One-Road Initiative (OBORI). Apparently the Chinese focus is natural resource development for export principally to China. The Indian-Japanese-Asian effort focuses on rural development and agriculture, energy, and  education. In addition they are interested in quality of life issues and within the region, connectivity. This is similar to the development practices that are found also in Latin America. (India itself is beginning a campaign to improve the lot of its farmers through the application of technology along with capital.)

The Indian Post Payments Bank next year expects to equip a large portion of its postmen with equipment including biometric readers, a debit and credit card reader, plus a printer. Thus home dwellers will be able to quickly and safely pay various bills.

"Chinese Government Plays Cupid to Help Youth Get Married" is an article about 100 million young people in China that are not married. The government is sponsoring a blind date service. It specifically suggests that marriage will aid in future development.

SBI Life this week had an IPO and produced two interesting details, for this the largest life insurer in India. The first is the offering was oversubscribed by a 3.58 times ratio led by institutional buyers. What was of interest to me is that High Net Worth Investors only utilized 70% of the allocation available to them and retail investors used just 85%.  From my standpoint the most interesting numbers were that in 2016 the Indian Life Insurance industry penetration was 2.7% and this compares with 7.4% for Korea, 5.5%  in Singapore, and 3.7% in Thailand.

Can you imagine what more I could discover if I spent another week, month, or years in India? Seriously, my very brief visit highlighted to me that investors should not isolate the impact of single nations in making decisions. China, India, Africa, and Latin America as well as the rest of the Emerging Counties are linked in many ways that need to be understood for successful long term investing. 

__________

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More Opportunities from Disruption + Confusion

Introduction

One of the relatively consistent habits of people in the global financial community is an insatiable focus on the current price trends and almost no focus on factors that may reshape their workplace. I see this right now, but I should admit by nature I am a contrarian and that I often focus on what I see coming over the horizon.

Financial Services Employment

Knowing people within the financial community I am conscious of an increasing number of senior employed executives looking for new opportunities and those recently “at liberty.”

Over the years this has happened a few other times and in most cases my friends have found new and profitable activities. During these periods I have said that based on the available people, on paper, I could form one of the best financial groups in the business. (The reason for the “on paper” caveat is knowing the personalities, I am not sure all of these experienced people could work well together.)

I perceive we have entered another and perhaps much larger such period. Recently I have had conversations with presidents of large and small investment funds groups, senior traders, strategists of various types, etc. Part of this personnel reduction is due to present and projected profitability squeezes. Part may be due to low (relative to the past) prices for financial organizations. As an investor in financial services stocks I am used to seeing this kind of cyclical behavior. Too many people within the financial community believe that their own value is similar to whatever is the current growth stock leader.

The problem of risk management is tied to the growing illiquidity in the markets which is addressed by Jamie Dimon on pages 19 and 20 in the JP Morgan Chase annual report^*. With his personal worry about abrupt rise in interest rates, it is likely that markets will become more illiquid and some traders and investors will be shouldering more risk.

^*A personal holding. I will be happy to send those copyrighted pages to subscribers who contact me. 

Using the often used phrase “This time is different,” I think we may be entering a new phase. For many years we have been going through a concentration phase largely through mergers or acquisitions. This trend could well see a reversal in the next couple of years and the individual investor could be the loser.

Government Interference in Compensation

On both sides of the Atlantic as well in selected Asian countries governments are interfering in the compensation practices of large financial organizations. Officially the politicians drive is to reduce the risk taking that leads to government bailouts. (A far better way to do this is to prohibit such rescues by the politicians in governments and particularly in their central bank dependents in sponsoring bailouts.) The latest action by the US government is to require those in senior jobs or those in a position to assume risk to have the bulk of their income to come from deferred equity ownership that will vest in 4 to 7 years and be available for recapture for cause.

New Enhanced Trading Groups

I suspect the real motivation on the part of these bureaucrats is to address their concerns for wealth inequality both on the personal and corporate levels. The initial rules are built on a scale with the greater the assets owned the more draconian the implications. The focus is on principal trading. If these regulations are fully implemented it is where the job and profit opportunities will be created. Instead of the bulk of trading being conducted on exchanges and by the members of the concentrated players, it will shift to smaller asset owners who control large amounts of clients’ money; e.g., Hedge Funds or similar non-deposit taking groups. These groups will have no obligations to the marketplace and/or to provide service to individuals. In effect we will have reinforced the kind of private markets that currently run most of the commodity and real estate markets. The new enhanced trading groups will need research for both decision-making and institutional marketing. Some of these groups will gather money through accounts, others may use private vehicles that that have similar characteristics to mutual funds.

Historically any attempts to legislate risk has only shifted to other locations including beyond borders. Thus the aggregate total of risks assumed is unlikely to change. People’s business cards and the location of some of their computer servers accessing the Cloud will change. By the way, the biggest source of risk for most citizens is the induced risk that is inherent in current government practices; for instance deficits, unfunded liabilities, and unaccounted for contingent risks.

The Enthusiasm Watch

As repeatedly set forth, I am on the watch for growing enthusiasm for stock prices as a warning device of a major top. Here are three cautionary signs:

• Only three of forty-four markets tracked by The Economist declined in the week ending April 20^th.

• Both in the US and Europe mutual fund investors are putting money into Fixed Income funds and out of Money Market funds showing a lack of Jamie Dimon’s concern about rising rates.

• Barron’s Big Money Poll of global money managers has 35% bullish and only 16% bearish with 49% neutral. However 59% are bullish on commodities. (They must have high confidence in their individual selection skills for their outlook for corporate profits this year is under 5% and under 10% in 2017. This suggests reliance on concentrated, less diversified portfolios.)

Standard Approach to Look for New Winners

One of the lessons I learned from an old market pro was to search the new low list for future winners. This is why I insisted on showing the lagging funds much to the annoyance of fund managements when I was publishing Mutual Fund Performance. I still believe it is a good exercise in the search of future winners. This view was reinforced with the arrival of Dimensional Fund Advisors' Matrix Book.

Near the very end of this interesting compendium were two pages that looked at twenty years of relative performance of developed and emerging markets which I found to be instructive. Below is a table for the last six years of the best and worst performing countries in these two universes:

Year	Developed		Emerging
	Best	Worst	Best	Worst
2015	Denmark	Canada	Hungary	Colombia
2014	USA	Austria	Egypt	Russia
2013	USA	Singapore	Taiwan	Peru
2012	Belgium	Spain	Turkey	Morocco
2011	New Zealand	Austria	Indonesia	Egypt
2010	Sweden	Spain	Thailand	Hungary

My data analysis points out how rare there is a repeat with only USA having a next year winning repeat and Austria and Spain repeating on the downside later.

Much more important in the emerging market lead, both Hungary and Egypt went from the worst to the best in a few years time.

Using the Hungary/Egyptian model I would be looking for opportunity in both Canada and Singapore.

Question of the week: How do you search for future winners?     

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All Rights Reserved.
Contact author for limited redistribution permission.