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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A. Michael Lipper, CFA

 

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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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Our Self-Appointed Mission - Weekly Blog # 846

 

         

 

Mike Lipper’s Monday Morning Musings

 

Our Self-Appointed Mission

 

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

 

 

 

“The World Turned Upside Down” 

“The World Turned Upside Down” played as the British Army marched off the Yorktown battlefield, ending the last military action of the American Revolution.

 

The Sunday announcement caused me to kill the draft of the intended blog for this week. 

  

With the letter announcing the end of President Biden’s campaign for a second term and his endorsement of Vice President Kamala Harris for President, the whole focus of what is important to investors changed. These events made me contemplate the meaning of the British army signaling the end of their military operation in America on October 19th, 1781. 

 

The rest of the world recognized that the US had become a world power one hundred and ten years later, on the 10th of December 1895, when the peace treaty ending the Spanish American War was signed. The US became a Pacific power for a while with their occupation of the Philippines. During the time from the end of the American Revolution and the end of the Spanish American War there were other wars, including the bloody Civil War. 

 

While I cannot determine what the critical events will be, or when they will happen, I expect it won’t be a smooth process. The Democrats are likely to form a circular firing squad. The Senate will be the center of power, surrounded by Governors, the money groups, and others who can make things happen from a protected position in the final run.      

 

Somewhat later the Republicans are likely to have their own internal battles between their top-down and bottom-up factions. 

 

While foreign governments and their internal forces were already influencing US activities and having an impact on US actions, it is more the case now. In the past it was the Europeans who played this role. Now the Asians will be the change agents. With President Trump’s desire for a weaker US dollar, he will have to successfully deal with China and Japan’s internal problems and also their trade with us. They are the two largest holders of dollars. China has grown twice as fast as the US for some time, although they are now close to a contraction. Due to changes in government philosophy, Japan needs to increase international trade. 

 

There is an increasingly large gap between the politically oriented stock market players and operating business managements. Quite possibly, the enthusiastic market players are going to wait to see how the following events play out, the attempted assassination of President Trump, the withdrawal of President Biden for his second term, and his endorsement of his Vice-President to replace him.

 

The US growth rate of consumer sales has been in decline for some time, causing executives to cut employment and dispose of less attractive operations. Companies have also had to juggle prices, quality, and the packaging of smaller quantities at old prices. 

 

Preview: 

I was preparing a piece on asset sector fund performance that I hope to finish if the world settles down. Past performance will likely be an aid in future selection. Perhaps next week. 

 

 

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Mike Lipper's Blog: We are Never Fully Prepared - Weekly Blog # 845

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.