Many Trends Within the Same Market - Weekly Blog # 941

 

 

 

Mike Lipper’s Monday Morning Musings

 

Many Trends Within the Same Market

 

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

 

          

 

Preface

The purpose of this preface is to share my long-term thinking, which in part drives my current investment thinking. There is no better portfolio manager thinker I have known than Peter Lynch, who produced a stellar performance record with a large equity mutual fund over the 1977-1990 period. One of his beliefs was “Know what you own, and why you own it.”

 

One approach to investing is to be index aware or agnostic. My approach is different in that it recognizes that all security prices are cyclically dependent due to both the expressed attitude of the individual stocks for security and to the market in general. My focus is on the client, recognizing that they often have several perceived competing needs.

 

For multi-generational accounts, long-term performance volatility is as important, if not more so, than simple performance, because it can shake people’s confidence. Volatility multiples focused on by pundits in the press can scare investors into dumping well thought out positions.

 

In many cases, accounts that are managed serially by members of the family have good results, often due to patience and having seen volatility in the past. There are a handful of globally managed accounts that have worked reasonably well, which have both low volatility and good long-term performance.

 

For future oriented accounts the selection process does not depend on the present roster of products. New products, or more germane new ways of filling critical needs can help companies become leaders in their fields. Apple (*) is one such company, although you should be aware that this approach can lead to failed products or approaches at times.

* Owned in client and personal accounts.

 

In today’s markets the primary way to avoid equity losses is to invest in fixed income securities, which often have higher yields than current short-term rates due to investing in lower quality or longer maturity bonds. This approach may lead to unexpected losses from higher interest rates, which might be discouraging and defeat the very purpose of temporarily getting out of the stock market, which is to have a buying reserve. I prefer short-term, under two-year maturities, or in a few cases middle yielding bonds with low price/earnings ratios. In the latter case, you should be willing to sell these bonds after a major market decline, even at a loss, to get cash to invest in stocks that are more growth oriented.

 

There is risk in the growing amount of debt being undertaken by governments, companies, and families, because of depleted accident/emergency reserves. This could lead to a situation we have not seen in 95 years. A significant change in the structure of the global economy that could take an extended period to recover from. Moving further in this direction should cause us to enter a period of reflection, recovery, and renewal. We need to be aware of the possibility that this structural change might happen.

 

Now a View of the Current Situation

If you look at what is being reported in the current media, you might think “the market” has a bullish future. The truth is, during the latest week on the “Big Board” only 745 stocks, or 26% rose. Even on the on the more speculative and shorter-lived NASDAQ Composite, just 31% of the stocks were sold at higher prices.

 

For those who have been trained to look at bond yields as a predictor of future stock prices, the average yield of ten high quality bonds picked by Barron’s rose 15 basis points for the week, while a group of medium quality bonds only rose 5 basis points. Rising bond yields mean lower bond prices, which is negative for stock prices.

 

Two companies I follow are Berkshire Hathaway (*) and McKinsey. Berkshire reduced the number of stocks in its portfolio while simultaneously buying its shares at 144% of book value. McKinsey, a privately owned company, preserved cash by cutting cash dividends and increasing equity distributions to its partners.

* Owned by managed accounts and personal accounts.

 

I pay particular attention to the performance of mutual funds. On a year-to-date basis through Thursday, 38 of 103 fund sector averages beat the S&P 500 Index Fund average. It has been very difficult to beat the performance of the S&P 500 Index for the past 10 years. Only 3 sector averages have accomplished that, and they were all driven by investor enthusiasm for “AI”.

 

The same thing happened among the leaders overseas, where a 1/3 of the emerging securities had some activity in “AI”.  This was particularly true in Taiwan and South Korea. AI labels, where the company is headquartered, should be viewed with caution, as we don’t know what percent of the chips and computers eventually land in the US.

 

One final statistic that I follow is the index of industrial prices put out by ECRI. For the week the index finished at 145.33, up from 142.00 the prior week and 32.58 12 months earlier. Obviously, problems in the Strait of Hormuz and other supply chain issues played a role in the increase.

 

Final impression

 All investments appear to have increased risks. So please be careful.

                                        

 

 

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

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Falling Confidence Beats Numbers but be Careful With 2nd Quarter GDP - Weekly Blog # 734

                                    

Mike Lipper’s Monday Morning Musings

Falling Confidence Beats Numbers, 

but be Careful With 2nd Quarter GDP

———————

Is a Structural Recession Coming?

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

Managing the News

The classical definition of a recession is two consecutive quarters of negative GDP. The first report for the first quarter indicated a decline of 1.4%. This was the headline, although the remaining bulls focused on subsequent reports adjusting first quarter results to a positive number that never made it into the conciseness of the market. Perhaps the message the market has taken is that this Administration is tone deaf. The White House had an afternoon and an evening to manage the news through its obedient media but failed to bolster confidence in the Obama team’s overall competence. It will be interesting to see how the second quarter GDP is handled after the July 4th holiday. If like the first quarter it is a negative, which looks more likely than not, the definition of two consecutive negative quarters representing a recession, may be viewed by some as fulfilled. If not, we may have to wait for an October surprise.

Current Pictures

Racetrack handicappers hope to find “smart money” to give them an edge. Two suggestions - Transportation and Speculators vs. Investor timing.

Transportation: One of the earliest stock market signals led to the Dow Theory, which states that a trend is likely to continue if the performance of the Dow Jones Industrial Average (DJIA) is confirmed by the trend of the Dow Jones Transportation Average (Rails) and visa-versa. The theory was based on industrial shares being more future oriented and rails representing freight that was actually sold. Applying this thought to the week’s performance. After 8 weeks of the DJIA declining, it was up 3 out of 5 days. However, the Dow Transportation Average was down 3 days this week.  This makes sense to me considering US rail traffic was down 5.4% this week. Of the 10 classes of freight, 7 were down and only 3 were up.

Market performance depends on which forces are dominant. Generally, there are more long-term investors owning shares traded on the NYSE than the more speculative holders that invest in the NASDAQ listed stocks. Larger passive index funds are more significant owners of “Big Board” shares. In terms of share volume for the week, only 47% of the NYSE shares rose vs 40% on the NASDAQ. In terms of transaction volume, the NYSE had 45% rising vs 42% for the NASDAQ. Clearly, participants in the market are not enthused with the current direction.

Since recorded time, civilizations have had economic cycles. While some were blamed on weather or plagues, most of the time the main cause was a prior foolish expansion that could no longer be supported. When this is recognized, it usually requires major structural changes to make progress. Is the forthcoming recession an advance signal of a structural depression? Quite possibly!!

A Problem Needs to be Addressed

The identification of the problem to be addressed is generally too simplistic. Global supply chain disruptions have almost universally been blamed on insufficient physical capacity. While temporary capacity limitations cannot be denied, the focus as usual is misplaced. There is a real shortage of qualified workers and most importantly of first line supervisors. In the US, we already know the ratio of publicly available job opportunities to registered unemployed has almost doubled. This is not purely a US phenomenon, as this week we were alerted to the UK’s ratio of opportunities/unemployed. There are now more opportunities than unemployed, probably creating a pattern I experienced in the late 1980s when we couldn’t hire sufficient qualified computer programmers in the US. We sought help from substantial software development shops in India. We were delighted when our designated vendor showed us the credentials of those assigned to produce the required software on a tight schedule. When it didn’t happen as planned, it became clear the good programmers we were introduced to were no longer there. They had left that employer for another, for perhaps an additional $5/week.

Today we are experiencing a decline in the quality and timeliness of deliveries at supermarkets, department stores, law firms, accounting shops, and hardware/software manufactures, etc. In almost all cases these organizations are desperate to find qualified workers, despite the high wages being offered. They have applicants, but they often don’t have the required work skills. The problem most often is that applicants don’t have the right attitudes toward work.

I suggest this is a generational problem, if not longer. The combination of stressed homes and a unionized bureaucratic school system is not producing disciplined students who value intellectual honesty, nor are they capable of budgeting their own time. To me this is distressing as a fiduciary and a consumer, but it doesn’t have to be that way. I am biased in favor of military training, sports teams, and religious organizations. In the US Marine Corps, officers quickly learn that the wonderful history of The Corps is due in part to non-commissioned officers, starting with Napoleon’s early rank of corporal. (Unfortunately, when cost- accountants run companies, they eliminate levels of supervision. They view it as overhead and don’t recognize that first line supervisors are the main cultural builders of a company.)

I hope we never again have a war that requires us to re-introduce conscription (draft). I say this for lots of reasons, including my grandchildren, great grandchildren, nieces, and nephews. However, as an analyst I am worried that at least half if not many more could not qualify to serve their country, due to their physical condition and mental discipline.

The likely business solution to those unemployed by choice is to encourage more automation. Much of the work done by low level workers has already been automated. Business and non-profits have already figured out that the cost of automation can be amortized over a few years, and so doing they eliminate a substantial number of problems in the workforce. Total compensation paid to lower-level employees vs. the cost of the facilities needed to support them does not offer sufficient pay-back.

This shrinkage of low-level jobs may lead to a permanent group of unemployed, at least in terms of the public record. While developed countries are moving down the replacement trend, it will take far too long to eliminate the unemployed problem. These concerns may be the underlying reason we cannot exclude the possibility of a structural depression.

Investment Conclusion

Be careful and invest wisely for the various likely futures and keep us informed as to what you are doing. We all need help.

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

https://mikelipper.blogspot.com/2022/05/inconclusive-but-trending-lower-weekly.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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A. Michael Lipper, CFA

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Haven’t Found Bottom Yet! Investments & Military Win by Committing Reserves Successfully - Weekly Blog # 732

 

                                

Mike Lipper’s Monday Morning Musings

 

Haven’t Found Bottom Yet!

Investments & Military Win by

Committing Reserves Successfully

 

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

Investment Success Defined 

Avoiding losses and participating in “bull markets” is the objective of my blog. To accomplish this goal, one needs to expect some losses. However, the key is to not lose too much capital, so gains are multiplied. The strategy I use builds up reserves when the prices of what my clients and I own are high compared to perceived general market risks. I allow capital reserves to build up to the point of meeting conservative cash expenditure expectations, plus a trading reserve for future investment. Years ago, insurance companies set up “valuation reserves” to capture gains above 20% to use for the next upswing. Inherent in this strategy is the assumption that there will be periodic down markets. The trick to making this a successful strategy is the proper timing and approach to committing reserves. 

 

Committing Reserves 

This is the single most difficult task, both for an investor and military leader. In each case the reserve can be wasted by committing too early, and that is why it is often committed piecemeal. For an investor it is important to identify a time and price soon before a price rise, whereas for the military it is near the point of exhaustion of the enemy’s supply chain. It is for this reason a market’s reaction to current events becomes much more important.

 

Why No Bottom Last Week 

 In theory, I should be calling a bottom for last week. We had a relief rally on Wednesday after the Fed publicly acknowledged inflation was more than transitory and committed to successfully addressing it. The next day, led by “growth stocks”, the market wiped out considerably more than the prior day’s gains, with further losses the final day of the week. 

Historically, the price level for the stock market occurs either before or after the high-volume day, when sellers feel compelled to liquidate at any price. We did not see this happen last week. I noticed at least three inputs that questions the longer-term outlook for stocks. 

 

“3 Strikes and You’re Out” 

This is what the baseball umpire yells when a batter misses the pitched ball three times. Perhaps that was the proper call for the week, with the three strikes against the Fed being their attempt to hit the inflation ball out of the park. However, they failed to see the very fast pitch delivered by the seasonally adjusted money supply. M2 grew 12.11% year-over-year, even after considering the current rate increase and three additional anticipated 50 basis point increases to 2.5%. This may be all the politically diseased Fed can do as it ignores the major cause of inflation, the stimulus (bribes) fed to the economy by the White House over the last two administrations. (I don’t know how much of the Russia-Ukraine war expenditures are in the current M2 numbers). 

Immediately following the rate rise, the major banks raised their prime rate to 4%. Remember, in theory the prime rate is reserved for the bank’s best credits and does not include much of a loss reserve. Currently, most banks are overflowing with deposits and a lack of good loans. Most commercial bank stock prices are also languishing based on their near-term outlook. If major banks require 4% on almost riskless loans, what should the investing and depositing public require from other financial institutions in the way of yield? This is the second strike against the market and the Fed. 

 The third and final strike is a curve ball ordered by the FTC and SEC. The regulatory mandates they extended way beyond prior policy practices.  If this expansion is permitted, public companies will expand less and many private companies will never be traded on US stock markets. 

To demonstrate how much the reach of these agencies has expanded. The newly appointed chair of the FTC recently announced she was examining the proposed takeover of Twitter by Elon Musk and a group of associates and lenders. The SEC simultaneously intends to examine the disclosures of ESG and compensation. (This could lead to transforming the current cyclical decline, from a bear market in progress to a secular recession/depression, following their FDR model.)  

 

A Bully Hits Someone Who is Down 

 Each week I view stock markets through the lens of mutual fund performance. Most of the time it is wise to pick an investment period that includes an up and down price market for analysis. This week I examined the latest fifty-two weeks, which includes both rising and falling markets. I found that there were only twenty categories that had positive returns out of 110 peer groups. The highest return was for the average commodity energy fund, which gained 97.33%. The smallest gain was 0.12% for dedicated short funds. The vast majority of the winners were asset heavy with a perceived marketable value. There were no intellectual property winners. Inflation is driving stock prices and the government is contributing to it, rather than addressing inflation, the biggest single tax on the financially disadvantaged. 

 

Question: Is your portfolio’s current value keeping up with inflation adjusted spending? 

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

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

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

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

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Best Bet: More Sweaters and Parkas vs Overcoats - Weekly Blog # 708

 

Mike Lipper’s Monday Morning Musings

Best Bet: More Sweaters and Parkas vs Overcoats

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

I don’t like to lose bets, especially investments bets. That being said, I am highly confident those in the northern hemisphere will suffer a colder winter than expected. The streams of cold weather from Asia which flow over North America and Europe are moving south this year and will bring a colder winter to the US. (This contradicts “global warming” or climate change predictions.) The second and preventable driver is the need for politicians to be re-elected.

The only game that counts in Washington DC is getting elected, which importantly is based on money deployed from all sources. Despite food prices reflecting rising transportation costs, the central government is determined to hurt the states supplying energy for heating. Three states in particular are being targeted: Wyoming, West Virginia, and Texas. The first two are the leading exporters of coal to the rest of the nation, with Texas being the leading exporter of oil and gas. (Natural Gas is a major source of heating for much of the northern portions of the country.) These three states have significant Republican majorities, both in terms of votes and more importantly political contributions.) 

The game of war often relies on misleading the enemy regarding your intensions. In Washington this is done by a friendly media focusing on stimulus, even though it is a major contributor to inflation. While inflation is the cruelest tax on the poor, those in power believe the loss of some votes in the city districts won’t endanger the city progressives.

There are already a lot of predictions regarding the sharp rise in the cost of heating this winter. Landlords, already having difficulty collecting rents, may cut the amount of heat. Non-profits, including government bodies without actual or equivalent “rainy-day” funds, may face similar problems. Schools in low-income areas may similarly have shortages of students, teachers, and administrators.

Many of the aggrieved or their representatives will appeal to the media for help in sweaters (inside) or parkas (outside). Those appearing in overcoats will be considered tone-deaf, no matter how well intentioned.

Faulty Responses

Many of the shivering responders shown on television will emphasize the spike in heating costs causing an increase in “common colds”. The number of non-workers will be blamed on “acts of God”, due to shifts in northern wind blasts. They will not likely admit that part of the problem was self-administered, either out of The White House or Capitol Hill. By curtailing the capital generation of energy producing industries the government has caused the US to be an energy importer. It is no longer the net energy producer and exporter it was two years ago. They did this by causing pipelines to close, or not be built at all. Furthermore, in a stretched global market for oil, bureaucrats are increasing the industry’s burden by holding price investigations.

Multiple Year Transitory

As is often the case, economists look at the top-down government numbers of goods produced or shipped for problems, not the services or labor required. In their calculation of supply chain shortages, they fail to recognize the nature of the labor shortage. Not only are entry level workers missing, skilled workers and competent/trustworthy supervisory employees in service functions are also in short supply. (A good bit of these absences can be attributed to "educational" sector unions from pre-nursery through PhD programs.) These issues will not be addressed in the coming cold winter.

Long-Term, the Federal Reserve is Trapped

The favorite tactic of those in Washington is to change the rules if they are losing. Members of Congress are trying to make various economic/government financial agencies into social arbiters, including the Fed. Neither the Fed nor their supervised banks are equipped or authorized to perform these functions.

To the extent central governments want to spend a lot of others’ capital on controlling climate conditions, they will sponsor increased spending. This will result in both the Fed and the debt market increasing global debt massively. One wonders whether present low interest rates will become generational lows. Will higher rates drastically change the allocation of credit to the detriment of consumers at the low end?

Causes of Inflation

Inflation is caused by having too much money and borrowing power relative to the level of goods and services on offer. By itself it would be self-correcting through changes in price, including foreign exchange. However, when central banks create more money than their economies can immediately use, it leads to inflation. This is exactly what has been happening, so much of the current inflation has been caused by stimulus (bribes) payments. Thus, governments are a source of inflation.

Investing Choices

Perhaps the only wise reason to own securities today is the belief that the managers of some companies will be able to grow dividends above average inflation after taxes. 

If you have other reasons let us know. 

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

https://mikelipper.blogspot.com/2021/11/lessons-from-london-mistakes-repeated.html

https://mikelipper.blogspot.com/2021/11/do-you-believe-congratulations-are-in.html

https://mikelipper.blogspot.com/2021/10/mike-lippers-monday-morning-musings.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.