Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

 

 

 

Mike Lipper’s Monday Morning Musings

 

Three Rs + Beginnings of a New Cycle

 

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

 

 

 

Three Rs Describe the Week

The first part of the week in terms of transaction volume on the NYSE + NASDAQ looked somewhat normal, but by midafternoon the world changed. We got the expected ¼ percent cut in Fed interest rates. However, during the press conference Jerome Powell stipulated his lack of confidence in the intermediate future outlook for Fed actions. As the conference went on, selling accelerated. By the closing bell many stocks had fallen, then some fell between 3-5% or more in the after-market. Interestingly, Thursday saw little movement. Trading volume for the first four days of the week was 4.72 million shares. On Friday there was news of one indicator showing inflation likely to decline, which was greeted with 8.13 million shares traded mostly on rising prices.

 

This was the first R, demonstrating the trader’s recalibration of inflation estimates, showing particular strength in techs and high-quality bond prices crunching.

 

The second R saw a further breakdown in the reversal chart pattern of the DJIA and DJTA. (Chart reading is an artform and is not accurate all the time.)

 

The third R, the need to deal with reconciliation of the budget, was perhaps the most significant and became known on Saturday. The final votes in favor were impressive. The House voted 366 to 34 in favor and the Senate 85 to 11. This proved my earlier view that there was no real landslide for President Trump. The American people don’t want much legislation or many executive orders.

 

What Does This Mean?

We live in a world where:

• Most governments are tolerated or downright unpopular.
• Technology appears to create more problems.
• People are afraid of both political and corporate leadership.
• The education sector can’t even run its own campuses safely. They are producing unemployable and over-privileged people only ready for “C-suites”.
• Hard science is not providing much help for the soft science needs of the population.

 

Several examples of not understanding labels hit me this week, emerging markets and large global companies dominated by the five largest firms. The largest firms are attractive because they are exporters to large markets. Thus, to be successful one must be global.

 

Another example is the published list of the 15 best and worst mutual funds. If you are a large investor, the list is misleading. Of the best performing funds, 13 funds were from large fund families, whereas only 6 funds were from large fund families on the worst funds list.

 

Even with AI people need to think more thoroughly.

 

Please suggest what you think the next cycle will look like. 

 

 

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Mike Lipper's Blog: Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

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Mike Lipper's Blog: Professional Worry Time vs Amateurs’ - Weekly Blog # 865

 

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Both Elections & Investments Seldom What They Seem - Weekly Blog # 860

 

Mike Lipper’s Monday Morning Musings

 

Both Elections & Investments

Seldom What They Seem

 

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

 

 

  

Gilbert & Sullivan nailed it when they titled one of their songs in H.M.S. Pinafore “Things are Seldom What they Seem”. This title should be attached to every article that discusses the investment implications of the next election and future elections. Currently, almost all the chatter is about the Presidential election, which also gets exclusive attention overseas. This is naive in the extreme for the following reasons:

1. Whoever is going to be sitting in the Oval Office will not likely be there for another term. Thus, they will likely have limited political power on Capitol Hill.
2. The House must start all tax and spending bills and both parties are split along ideological lines.
3. The Senate, with 6-year staggered terms, requires critical legislation to be passed by 60 votes. They wish to terminate the filibuster rule. Politically, the senate is even more divided than the house. Additionally, a number of senators are interested in having a seat in the White House and they typically have larger financial estates than members of the House.
4. Both political parties believe Washington should dictate what Americans purchase by using grants and tariffs. (Democrats favor “EVs” and labor union produced voters, while Republicans seem to favor tariffs. Our economic history shows that countries supporting consumer choice grow faster and sounder.)
5. With deep divisions on Capitol Hill and changing legislative leadership, including the chairs of committees on the Republican side, it is going to be difficult to get bills passed.
6. The role of the Supreme Court will be critical. The present Court believes it is responsible for determining when cases comply with the written Constitution. This Court decided that a prior court decision on Roe vs. Wade was unauthorized. The issue was not about abortion, but whether the “Warren Court” 50 years ago sanctioned abortion under the Constitution. The Founding Fathers limited the powers of the Federal government to those items specifically enumerated in the Constitution, leaving all other decisions to the individual states.   

 

Possible Peak Two Fridays Past

Some investors are more focused on their long-term investment responsibilities than political decisions. However, too many economists have become mathematicians and too many political scientists have become statisticians.

 

Some of the signs that all is not well:

1. AAII’s weekly sample survey of investor sentiment changed dramatically. Two weeks ago, there was 20 percentage point advantage in favor of the bulls for the next 6 months. In the most current week, this position shrank 7% points.
2. The weekly share volume on the NYSE declined 42,209 shares, while NASDAQ volume rose 3,034,261 shares. (Considering prices fell during this period, the increase in volume is bearish.)
3. Standard & Poor’s tracks 32 indices weekly and only 1 rose last week, by only 0.05%.
4. The underwriting of speculative bonds rose sharply in late September and thus far in October. The sharp increase in underwriting was well beyond the need to refinance existing debt. This suggests savvy speculative bond issuers see higher rates ahead when they need to sell more debt.

 

Question: How do you see interest rates in late 2025, 2026, and 2028?

 

 

 

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Mike Lipper's Blog: Melt-Up, Leaks, & Echoes of 1907 - Weekly Blog # 858

Mike Lipper's Blog: Stress Unfelt by the “Bulls”, Yet !! - Weekly Blog # 859

Mike Lipper's Blog: Mis-Interpreting News - Weekly Blog # 857

 

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An Informative Week with Many Questions - Weekly Blog # 759

Mike Lipper’s Monday Morning Musings

An Informative Week with Many Questions

 

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

                   

 

 

CPI Thursday Morning Pivot or Rotation? 

The readings for the Consumer Price Index and its components were announced before the market opened on Thursday. They were not as high as many expected and market participants treated the less bad news as good news. Many chose to believe the less bad news would embolden the Fed to reduce the size of expected interest rate increases. In effect, the Fed was expected to “pivot”, messaging the market that inflationary increases would be reduced. Their enthusiastic response to the gap opening of the market was not narrowed on either Thursday or Friday.  

 

Market analysts believe that price gaps must be closed before the market can move in the direction of the gap. Most of the time this is the case, but not always. It may take a while. 

 

Market pivots tend to be infrequent, and partially reversed quickly. They can have limited long-term predicative value. However, they can be an early identifier of a meaningful rotation. In this case, the odds seem to favor this pivot not being a significant rotational change. My thinking is based on two inputs. 

 

1.  The mid-term election was largely motivated by a vote against the other side’s leaders and not by a vote in favor of positive growth strategies. Both parties have leadership problems. The Democrats have no fresh leadership with a significant following. The Republicans in some cases did not field attractive candidates and did not match the opposition’s operational talents. With the House of Representatives in the hands of the Republicans, I expect little in the way of new legislation. Many of the expected Executive Orders will also wind up in court. Stagflation will likely be the result. 

2.  Transactional volume will likely be less than expected in a normal bull market. Numerous brokerage firms, investment advisers, and investment bankers, are cutting back on lower producers or those too well compensated.

 

T. Rowe Price Lessons for Investors 

(The following discussion should not be interpreted as a recommendation. T. Rowe is an old personal holding. I have known its CEOs going back to Mr. Price. The firm is investing its capital on broadening its domestic and international marketing and is also developing new distribution channels. Doing so will take time and money to reach the firm’s desired profitability levels. A topic I can address off-line.)

 

T. Rowe Numbers for the Week ended November 11th

• Opened $103.71, closed $133.34 
• Monday-Wednesday share volume in millions of shares:  1.74, 1.85, 1.86 
• Thursday and Friday share volume: 4.49, 5.55 
• Weekly Price Gains: DJ Asset Managers Average +13.92%, T. Rowe +28.57% 
• Institutional Ownership 77.12 % 
• Top 4 shareholders own 26.62 % 
• Thursday’s gap of 5.48% not closed on Friday 

 

While the company is listed on the NYSE, it is essentially an institutional stock owned in some respect by competitors. The size of the price gap and above average gain demonstrates the lack of liquidity on the upside. I don’t know what the liquidity and potential price gap will be on the downside.  

 

Another hint of the professional market dominating the NASDAQ marketplace were the weekly declines as percentage of shares traded: 21.16% for the NYSE vs. 32.85% for the NASDAQ. 

 

Other Thoughts of the Week 

• The IMF believes 1/3 of the world is in recession 
• 7 out of 10 large battery producers are in China 
• With the 2-year and 30-year US Treasury yields at 4.32% and 4.08% respectively, it suggests the minimum expected return on high grade paper will be required for a long time by investors. Could it also mean that this is the maximum safe distribution from high quality accounts in order to preserve principal? 

 

Should real estate investing be divided between current income production and the conversion profits from changing the nature of the property? 

 

Historically, roughly half of small businesses fail within five years. Isn’t it likely this will increase during a period of stagflation? Small company investing has traditionally produced higher returns when large companies are having problems during a stagnant period. However, there will also be offsetting small-cap losses during the period. 

 

What are Your Thoughts? 

 

 

 

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Mike Lipper's Blog: Are You Getting Value from Numbers? - Weekly Blog # 758

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A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.