Bad Comparisons Can Lead To Faulty Conclusions - Weekly Blog # 905

Mike Lipper’s Monday Morning Musings

 

Bad Comparisons Can Lead

To Faulty Conclusions

 

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

 

 

 

Your Portfolio vs. Stock Indices

The biggest trap the media and sales community set for both institutions and individual investors is comparing portfolio performance with a stock index constructed by a publisher. The best US stock market index is probably the S&P 500 Composite (SWX is its symbol).

 

The index is published by Standard & Poor’s Global (*), whose components are selected by data analyst editors, not investment managers. In a performance year where a company splits into two or more publicly traded stocks; the index carries each component of the former stock for the performance year. That is why the SWX measures slightly more than 500 stocks at times. Additionally, almost every active investor’s portfolio contains some cash or similar instrument. In periods of large gains or losses, the performance of non-equities will affect the performance of an account, but not the index. Furthermore, it is extremely rare for an active portfolio to own anywhere close to 500 names.

(*) Owned in client and personal accounts

 

In measuring the performance of the SWX, the measurement compares the closing trade price of the prior trade date to the ending price of the current day. It is extremely common for the ending price to be higher or lower than what an investor receives, so the actual performance of an active account is likely to be different than an end price calculation.

 

The management committee of the Wall Street Journal and the Standard & Poor’s editors have decided that SWX will only contain stocks that are listed on US stock exchanges. They also do not limit the percentage size of holdings in the composite, while the SEC limits diversified mutual funds to holding no more than 5% weighting within the portfolio of any given stock at cost (not market). Non-diversified funds are not restricted this way.

 

In today’s world, managed accounts are almost certain to hold cash or fixed income instruments as redemption reserves. Additionally, opportunity reserves will in many cases include non-US listed securities.

 

Many years ago, for these reasons, we convinced a number of outside directors of mutual funds to compare the performance of their funds to similar portfolios of funds. I believe this is the way almost all investment accounts should be measured, whether they are funds or not.

 

Other Mis-labeling

Last week, three of the five leading large-cap stocks were labeled financials; JP Morgan Chase (*), Morgan Stanley(*), and American Express(*). None of the articles I read mentioned that Charles Schwab(*) was the fourth largest declining large stock on Friday. Clearly, Schwab has something else going on that the first three do not, despite sharing the same industry label.

(*) Client or personally owned

 

Also last week, there was no mention of various countries whose local market indices showed gains, Europe 6 and Asia 12.

 

Another example of incomplete labeling was a headline of Goldman predicting that “Gold will hit close to $5000, if Trump undermines the Fed”. Perhaps true, but other commodities and some foreign stocks may do just as well. (Coincidently, a strategic collaboration between Goldman and T. Rowe Price to create a range of public and private investments was also announced. As a part of this collaboration, Goldman will invest $1 billion in open market purchases of T. Rowe Price stock.  Perhaps the more important message, is that Goldman believes the market is not offing enough diversity.)

 

Question: What are your thoughts? 

 

 

 

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It May Be Early - Weekly Blog # 898

 

 

 

Mike Lipper’s Monday Morning Musings

 

It May Be Early

 

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

 

 

 

A Usual Trap

A classic mistake in making future plans is focusing mainly on the present. In search of an investment policy for the next few years or longer, one should look at the causes of the main trends, not the size of the tariffs that have been announced.

 

The key force behind the announcements on tariffs is Donald Trump. His background is one of complex negotiations evolved from materially different views of how he sees the present and the future. I believe The President saw a critical problem of unfair trading terms facing the U.S. and saw a way to change the terms in favor of the country. He saw a way to solve the problem through meaningful discussion with the powers on the other side. The key was getting the right people around the table.

 

The core elements of unfairness are to be found in non-tariff trade barriers (NTB) erected by commercial interests with official or unofficial government support. (A number of examples were listed in last week’s blog, copy available.) While there is no published total of each country’s NTB effects, some experts believe their impact is twice the level of tariffs applied.

 

Mr. Trump’s way of dealing with foreign countries is to make the host nation an ally by using the size of US tariffs as a hammer. This is the reason behind the high announced tariffs, which is where President Trump expects the real bargaining to begin. I expect negotiations with major trading partners to take most of the summer. We may never fully understand the various changes to NTB’s, but a good clue will be changes to US tariffs.

 

Clearly there is another element to the aggregate size of the final US tariffs, the amount of cash expected to be paid to the US Treasury. This needs to be meaningful enough to keep the growth of the annual deficit acceptable to an unknown number of Republican Senators.

 

Most of these should be settled in the fall and early winter, so they do not unduly impact the mid-term elections. The economic background to the elections may be influenced by layoffs and the administration’s attempt to expand the economy. Additionally, further international actions may be the cause of how some state elections turn out.

 

The current crosswinds shown below may also impact the level of markets during this period:

1. After a period of outflows, T. Rowe Price is cutting staff.
2. Freight railroads are growing from China to Iran and Spain, for US continental trains, and other trains from Canada to Mexico.
3. Tariffs may encourage smuggling.
4. The latest weekly American Association of Individual Investors (AAII) sample survey showed a 39% positive and negative 6-month outlook.
5. A study of structural bear markets shows the average breakeven to be about 9 years.
6. The critical operating problems facing the US government is no different than those facing commercial and non-profit activities, a focus on effectiveness, not efficiency.
7. Jaimie Dimon has shared the following thoughts:

• Tariffs will be inflationary
• US reserve currency status rests on military superiority
• Markets are not low
• Lessons can be learned from the turnaround of Detroit and problems created (and elongated) during the 1929 crash
• Dollar weakness helps US multinationals 

As usual, I hope you will share your insights on the various thoughts expressed.

 

 

 

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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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The Strategic Art of Strategic Selling - Weekly Blog # 850

 

         

Mike Lipper’s Monday Morning Musings

The Strategic Art of Strategic Selling

 

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

 

Playing the Game to Win

Playing baseball, producing a great painting, or writing a great piece of music, depends on many moves beyond a single swing of a bat, a great color, or a single melody. It is the same managing an investment portfolio. Amateur investors often evaluate two to hundreds of individual securities to choose a single security to sell.

 

Investors acting as long-playing professionals consider a myriad of factors in making the decision to sell a portion of their assets. The sole decision should not be based on the odds of the price of a security rising or falling a meaningful amount in a significant time period. The purpose of this blog is to examine the other factors one should consider.

 

A well-considered security contributes to the rising or falling of prices for the entire portfolio, in part as a result of its weight in the portfolio. Some managers may want to equal weight their components, but time creates changes in weighting. Other managers may choose to heavily weight some positions or have a portion of their portfolio as a "farm-team". This allows them to avoid missing the right idea, without making a significant commitment. One way to reduce daily volatility is to have a large number of positions, at the expense of near-term performance.

 

Other ways to examine a portfolio is to evaluate the risks the portfolio manager chooses to take. These include some of the following:

Inflation

Foreign Exchange

Political Risk

Critical Personnel

Legal Concerns

Tax Risks

Concentrated Personality Risks

Engineering and Manufacturing Risks

Other Risks

 

One of the bigger risks is owning too many speculative stocks with inexperienced shareholders. Warren Buffett, in managing Berkshire Hathaway (*), adjusts the size of some of his larger positions and/or hedges some holdings with others.

(*) Positions held in managed and personal accounts.

 

Some Clues in Plain Sight

• Industrial prices, as measured by the ECRI, are slightly lower than a year ago.
• The implications of having large short positions may not be as negative as it appears. Some of these may be short against the box.  (Short position offsetting similar long positions. Possible examples are Franklin Resources 7.72% and T. Rowe Price 4.21 % of float. Both are held in personal and client accounts)
• There are approximately 5 times the number shares traded on the NASDAQ vs the NYSE. This suggests that in a low-volume week the remaining trading interest is speculative.
• Studies indicate tariffs are inflationary and will lead to declines in employment, growth, and competitiveness.
• James Mackintosh, a WSJ columnist, suggests the market is very expensive using 3 measures of CAPE adjusting for inflation the S&P 500, and the Fed model. (If one looks at long-term rate of gains performance records. They decline over time, the longer the period the lower the rate of gain and are below the spectacular performance of high-performing stocks. This probably means large gains now are eating into longer-term performance results.

 

Question: Does anyone see parallels to the period between the assassination of the Archduke and the beginnings of the actual conflict and starting WWI?

 

 

 

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Understanding the Universe May Help - Weekly Blog # 842

                   

 

Mike Lipper’s Monday Morning Musings

 

Understanding the Universe May Help

 

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

 

 

 

How can High Growth Stocks Co-Habitat with Flat Value stocks? 

Well-known commentators have recognized that stocks with radically different investments attractions can co-habitat without the more enthusiastic followers driving out less ebullient investors. Although from time-to-time the dominant species kill off weaker ones. 

 

As is often the case, earth bound investors have too limited a view. My exposure to the Jet Propulsion Laboratory managed by Caltech suggests a broader view, including other planets and similar elements. So far, we have not found any planetary bodies possessing a similar atmosphere to earth, so war between them seems unlikely. 

 

This suggests to me that growth and value can co-exist. The high price to earnings for extreme growth is neither a threat nor an inducement to own single digit p/e stocks. Extreme growth “planets” will move to their own rhythm and will not usually be impacted by value-oriented bodies, despite attempts at colonization.  

 

To show the difference we can look at the current year-to-date investment performance of two funds managed by Vanguard.  Their S&P 500 index fund has gained +15.51% this year, while their Total Bond II Institutional fund has fallen -0.20% for the same period. The S&P 500 has fellow travelers like the NASDAQ Composite, with a +18.65% return. The performance gap between the S&P 500 and the NASDAQ may be closing. This past week saw stocks on “The “Big Board” decline 44% vs 53% for the NASDAQ. 

 

Trading liquidity could be a contributor, with small and mid-cap stocks dropping for the past 13 weeks. Another factor could be the lack of dividends.  The 30 stocks in the Dow Jones Industrial Average (DJIA) have 3 non-dividend payers, or 10%. There are twice as many non-dividend payers in the Dow Jones Transportation Index, with one-third less positions, representing 30%. 

 

Market Structures are Changing   

Large Multi-Product/Service Financial firms have reacted to the slowdown in their revenue growth by forcing their various product/services silos to work to expand the firms’ sales base. Their model is similar to department stores which are closing or becoming depots for orders placed online. Another issue is good department store salespeople believing the customers are theirs, not the stores.

 

One attraction for sales teams leaving “wire houses” is Raymond James’* belief that customers belong to the brokers, not to their firms. They offer three alternative ways to join Raymond James. I believe there is a natural peak of good customers for every trade, after which new efforts will lead to lower margins.

 (*) Designates a position either owned by customers and/or personal accounts.  

 

An example of a smart move is Morningstar’s sale of their TAMP business, which recognizes that the number of fund distribution points is shrinking. 

 

T. Rowe Price stated in their mid-year outlook that the risk of recession is now lower. That is possible, but history suggests the higher securities prices go for a narrow segment of the general market, the more risks rise. 

 

Other Brief Comments and Observations 

The US and China agree that they prefer seniors stay in the countryside rather than come into the cities. They also both want more babies produced. The rich country replacement rate is currently 1.5% vs. a neutral rate of 2.1%.  

 

In a period where national productivity is low, the idea of creating holidays like Juneteenth and Labor Day looks politically motivated. Each day of lower productivity increases the risk that lower income jobs will be replaced by machines that can work 24/7, 365 days a year. 

 

Institutional investment sentiment was lower in June than May and April. Currently, 53% of the surveyed institutions believe a recession is not expected for the next 18 months. (I suspect there is a bias at work in their projections. Many, if not most of the respondents are primarily employees rather than owners of their businesses.) 

 

The big four accounting firms are laying people off. 

 

There is a somewhat useful Walmart Recession index of future risk, which increases when store sales are higher than the movement of their stock price.      

 

The standing military in Russia, Ukraine, and China are finding that they are not properly equipped to accomplish their mission. They point to corruption as the cause. (I suggest corruption is something of global problem. Perhaps Dr Spock or his replacement can solve the issue during an intergalactic conflict.) 

 

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Worth vs Price Historically - Weekly Blog # 821

 

Mike Lipper’s Monday Morning Musings

 

Worth vs Price Historically

 

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

 

Merchants Needed

Despite what many believe is the oldest profession, growers and herders were the first tribes to survive. As both tribes frequently had more of their own product than necessary, they needed to exchange their excess production with members of the other tribe. Both tribes were skilled in their own production but did not fully understand the other tribe’s costs. Initially, the agreed price was in terms of quantities between the two commodities (x sheep for y bales of cotton).

 

Fairly quickly, solely mathematical terms of exchange (3x for 5y) became insufficient in terms of defining the starting quantity and conditions of transfer. The exchanging parties often did not know or trust the other party. Thus, there was a need for a middleman to determine an agreed price between buyer and seller. The middleman would necessarily be known or recognized by the would-be traders as someone who could be reasonably trusted and was capable of developing accepted terms of trade.

 

With buyers and sellers geographically separate, both in terms of distance and possibly language, the value of a somewhat trusted third party became even more important. Still further elements became essential, a recognized type of money, or later, credit.

 

Over time, the third parties evolved into merchant houses or merchant banks. When dealing across borders and cultures the participants were often happier if the money or credit exchanged was issued by a bank, especially if the bank backed by a government with a wealthy family behind it. At this point these transactions utilized money in the form of coins convertible into known quantities of precious metals.

 

Foreign Exchange

When the western world was ruled by Rome, the value was understood to represent an understood bundle of goods and services. This worked well when the government controlled the coinage. A problem arose when government expenses for war or extravagant expenses rose beyond an acceptable level of taxes paid. A conflict that exists today.

 

Governments addressed the problem by gradually debasing the currency, such as substituting copper and other base metals for precious metals. As governments did this differently, the purchasing power of their money became dissimilar to one another, both in ancient times and today.

 

Those who suffer from a liberal arts education are taught incorrectly that the English Magna Carta was forced by the public on the English king. The real cause resulted from the Barons revolting against the increased tax load on their land. The increased tax load was caused by the expense of the Crusades and the ransom paid for the release of their king who was held hostage in Europe.

 

Today our federal government is changing the rate of taxation and how it is applied to both income and estates. Since foreigners derive earnings from activities and trade in the United States, they react by reducing their exposure to the US dollar, reducing its value. This is currently an issue for an investment committee on which I sit. In looking at our portfolio and foreign expenses at the last meeting, I suggested we begin tracking the changing value of the dollar. It is also something I need to do in looking at portfolio selection.

 

A Historic Portfolio Change

(Please do not take this discussion as a recommendation, as that requires careful analysis of the needs of an account. T. Rowe Price is held in a personal account and some client accounts.)

 

The man, T. Rowe Price, started his investment counsel firm in 1937, a year of a few months of gains in a period of stagflation. Mr. Price was one of a few managers investing in growth stocks at the time. Sometime after the conclusion of WWII he became concerned that the inflationary habit had taken over management of the economy and by 1979 he was disturbed about how the US was doing. He started managing money to graduate from FDR’s New Deal, implementing a philosophy he called New ERA in a new fund concerned about government led inflation. In 1979 George Roach became his assistant, and I believe in 1997 he became the portfolio manager. He later became President of the firm. George kept with Mr. Prices’ concerns, but he allowed the rest of the firm to continue with their growth stock orientation, which produced a very commendable record.

 

Prior to December 2023

The T. Rowe Price New Era Fund was managed with extreme consciousness of inflation. This translated into investing in common stocks of companies expected to rise in the future as inflation rose by investing in assets, not earnings. Most followers of the New Era fund viewed it as a commodities fund because that is what the portfolio looked like.

 

Shinwoo Kim has been the portfolio manager for New Era since 2021 and has been with T. Rowe since 2009. He has proclaimed that commodities have been and are in a long bear market ever since he became portfolio manager, but that changed in December. On the first of December hea as portfolio manager of New Era affected a considerable change in its portfolio, returning it to Mr. Prices’ basic concerns.  

 

Kim feels the US has migrated to a world where inflation and excessive federal government spending is the principal driver of investments. After ten years he has concluded, and convinced the rest of his investment committee, that the commodity cycle is about to change. He expects future investments to benefit from cyclical earnings growth, which will produce better results than ownership in highly valued assets.

As a natural resource fund New Era has not done poorly, compounding at +2.97% compared to the average Natural Resources Fund’s +2.69% over the past ten years. I suspect this outcome was largely the result of its yield, not earnings or Price/Earnings expansion and/or P/E expansion. (The result was not measured against the changing value of the dollar.)

Economists have tagged the price of copper as Dr. Copper. As the price of copper has performed better than most economists over time. The use of copper by the electrical/electronic industries and construction activity gives its use a cyclical growth trend. Other structural changes expected to benefit the portfolio include Uranium and US shale production. The fund believes the long-term outlook for production in Marcellus/Utica as well as Permian is understated. Additional attractive areas for investment include industrial gases and pipelines. (This brings to mind Berkshire Hathaway- a position owned in our personal and managed accounts)

 

 

 

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Possible Investment Lessons - Weekly Blog # 795

 

Mike Lipper’s Monday Morning Musings

Possible Investment Lessons

 

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

 

  

Not Cured Returning Employee Risk

“Cancel Recession” or “Soft Landing” are the media headlines and expressed views of many investment pundits. They could be correct, which may be unfortunate for long-term investors. Through the ages people have identified the primary cause for various economic cycles ending. These historians could be correct, or their labeling may say more about them than the actual causes. Nevertheless, after an expansion, analysts often seek reasons for the next correction. I am one of those worrywarts.

 

The tip of the spear for most successful military campaigns is reconnaissance. (That is why, like Robert E. Lee, I look to find “the hidden road”. The hidden road allowed US troops, including a group of Marines to get close to Mexican fortifications undetected during the Mexican American War. The subsequent Mexican defeat is remembered in the Marine Corps Hymn.)

 

In many studies the focal point of a critical change in direction results from the growth of imbalances accumulated over time. While there are always imbalances in societies and economies, they occasionally reach extreme levels. My recon of current conditions suggests the following imbalances are present today:

1. Wealth disparity within societies and countries.
2. Technology gaps
3. Demographic differences
4. Educational levels
5. Leadership characteristics
6. Medical capabilities
7. Rising levels of mistakes

 

In each of these situations the spread between the leaders and the rest is widening. At some point people will tire of waiting to catch up. Envy will drive some to seize the critical elements of perceived success. This can happen within a society or between countries.

 

We are currently in a bipolar or multipolar world. Critical players are not only the US and China, but also multipolar players including Russia, Islam, Japan, and the ROW (Rest of the World). The spread of technology, communications, and envy will at some point lead to conflict, for which we are not prepared.

 

The world has been somewhat prepared for these conflicts by the changes that occurred in the post COVID world. Many of these changes were instigated by slowing economic growth. The risk to discontinuation of these and related changes is an attitudinal switch from protection to expansive growth, labeled as no or little recession.

 

This is similar to the risk of a returning employee who has not gotten over his/her cold or other communicable problems, leading to widescale sickness throughout the worksite. We no longer require a doctor to notify us of a complete recovery, or the number of days without symptoms, etc. We may be taking a similar risk by assuming lower interest rates, more capital, and higher stock prices will be the cure for all our economic and social problems.

 

Most prolonged periods of growth happen after extended periods of contraction, which we have not yet had. We are instead experiencing the frivolous spending of dollars and time, with an increase in errors and short-term oriented leadership.

 

Current Briefs

• T. Rowe Price executed a second 2% mostly non-investment staff labor force cut. It led to a significant price jump, similar to what Franklin Resources experienced.
• The weekly AAII sample survey bullish reading backed off from 51.4% to 44.9%, with a smaller rise in its bearish reading, from 21.5% to 24.1%.
• High-grade bond yields rose more than medium-grade yields, 54 basis points vs 18 basis points.
• Chinese youth are exemplifying capitalism by not accepting manual labor positions in the hope of securing tech jobs.
• Some retail goods buying may be anticipatory in an effort to avoid expected price increases and shortages.

 

Summary & Conclusion

There is an investment risk in accepting no recession or a small recession for long-term investment. Not all current data is supportive of the general prospect of a small price risk. While not predicting a new low is necessary to end the down cycle, it is possible. Watch the data carefully and correctly interpret the news between now and the presidential election prior to the winter of 2024. Be careful.

 

 

 

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Michael Lipper, CFA

 

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Statistics vs. Influences-Analysts vs. AI - Weekly Blog # 785

 

Mike Lipper’s Monday Morning Musings

Statistics vs. Influences-Analysts vs. AI

 

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

 

 

 

Raw Materials

When my grandfather entered the brokerage business in the early 20^th century there were no named analysts, only statisticians.  I believe the New York Society of Security Analysts (NYSSA) was founded in 1937 as one of the first local luncheon meeting groups. (Many years later I was elected President of this the largest analyst group in the world.)

 

A statistician deals with numbers, usually the limited amount published by companies and perhaps market measurers. Analysts however, as with military and commercial intelligence gathers, guess as to critical non-public information. One of the things I learned in the US Marine Corps was that before undertaking an assignment it is helpful to make a list of Essential Elements of Information (EEI). I was never given enough time to complete the list before moving out to accomplish the mission.

 

Perhaps it is ironic that some of the financial community, through the wonders of search programs on fast computers, are retrogressing to becoming statisticians.

 

The rest of this blog is devoted to possible influences that can lead to investment conclusions not connected by Artificial Intelligence relationships, perhaps because no one has made those connection in written texts. As with EEI, some of the influences do not lead to correct results but should be examined anyway. A wrong connection can prove to be inaccurate, but useful in improving the road to the right solutions. (This is often of great value to Caltech’s later research successes.)

 

Leading to Useful Conclusions

 

Possible US Stock market Direction

1. 83% of 2023’s gains in the S&P 500 thus far come from only 5 stocks.
2. Large market-capitalization stocks now have a preferred position. Year-to-date large-cap mutual funds have on average gained +9.85%, mid-caps +3.28%, and small caps +1.56%.
3. While a greater number of shares on both the NYSE and NASDAQ traded this week at rising prices vs lower prices, there were more stocks going down in price than up in both markets.
4. Do Treasury Bill yields predict inflation averaging 4.29% for the next two years, then dropping to only 3.69% over the next ten years?
5. A number of companies are in the process of meaningful transitions, probably suggesting their past financial statements are not particularly useful in predicting their future earnings power or stock price (Goldman Sachs, T. Rowe Price, and Disney are examples).

 

Where is the US Going?

The future belongs to the youth, as is usually the case. An upbeat hope was expressed for them by David Solomon, CEO of Goldman Sachs, keynote speaker at the NYU Stern School baccalaureate graduation. The brief talk was of interest to me for two reasons. First, it was the commencement for a grand nephew of mine. Second, Goldman Sachs is an investment in my client and personal account portfolios, which have performed well but is going through a difficult period as it restructures. While his comments were directed at the graduates, they also had relevance to Goldman Sachs and those in the investment business.

 

His comments are summarized briefly below:

• Life is a marathon
• Enjoy the hustle
• Good enough, isn’t
• Choose excellence
• Like connecting with people
• Spend time in pursuit of life’s goals
• Work longer
• This generation is going to Mars
• Focus on where to learn

 

A very different view can be gleaned from a survey of young people looking for their first job. The following are characteristics of what they are looking for and the percentage who want it:

• Flexible hours (68%)
• Retirement contributions (34%)
• Mental health benefits (28%)
• Student loan assistance (28%)
• Unlimited time for PTO (27%)
• A 4-day work week (26%).

 

China

1. Household bank accounts = $6.7 Trillion, which is greater than Japan’s GDP.
2. Private companies employ 90% of urban employees.
3. 20% of 16–24-year-olds are looking for jobs
4. The Central Government of China is holding meetings with governments in Central Asia. (The C5 counties of Kazakhstan, Tajikistan, Kyrgyzstan, Turkmenistan, and Uzbekistan. (All former members of the Soviet Union.) These countries are part of the critical rail and truck roads to transport both Chinese products and the natural resources of these countries. However, Chinese suppression of the Muslim Uyghur population in their Xinjiang region could cause problems. I believe the US will be involved with Ukraine for a long time as it is one of the critical players in the Black Sea, which along with the Caspian Sea is the western front for the C5 counties and China.

 

Working Conclusions

Even if you think you are just investing in the US, you are investing globally. Because critical linkages are between people, not texts, we are going to need more and better analysts throughout the world.   

 

 

 

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Michael Lipper, CFA

 

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