An Awkward Moment with Frustration not Exhaustion - Weekly Blog # 591

Mike Lipper’s Monday Morning Musings

An Awkward Moment with Frustration not Exhaustion

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

Trying to develop a sound long-term investment strategy at any time is difficult, as most of the time we are clearly not at a top or bottom of a significant market move. We wander along an uncertain path to an eventual turning point, but each day, or in my case week, I must read the current sign posts to decide whether or not to change direction on the path I am traveling. Currently, there are three difficult choices to select from:

1. Stay reasonably fully invested in the upward sloping secular trend, accepting that there will be periodic cyclical movements.
2. As the opportunities and risks in today’s world are not the same as in the past. We should become increasingly defensive by building meaningful cash reserves.
3. Prepare for global policy mistakes that causes devastation.

I put the chances of being correct for each of these choices at 65%, 30% and 5%, respectively. On an overall basis I would improve my odds by sub-dividing the portfolio into timespan segments and periodically re-weight the commitments to the segments based on both perceived future conditions and the changing needs of the beneficiaries.

These three working conclusions are based on the following inputs:

Secular Continuation with Bouts of Cyclicality

• Most of the current volume is being generated by those that have a short-term time horizon. They are being whip-sawed by politically oriented news which is generating a lot of frustration. However, it is not generating the quantity of transactions representative of final exhaustion, or a complete retreat from participation.
• Nevertheless, traders are making decisions based on liquidity e.g. compare the ratios of advances to declines on the NASDAQ 211/314 vs. NYSE 411/229. (In general stocks on the NYSE trade in greater volume than on the NASDAQ) 
• Net flows into and out of ETFs shows short-term withdrawals this week. The two largest withdrawals totaled $4.6 Billion and the two largest net purchases totaled $1.2 Billion. The S&P 500 and MSCI Emerging Markets were sold and Consumer Staples and Gold were bought. 
• Even after Friday’s drop of 3% for the NASDAQ it is till up +16.63%, whereas the DJIA is up only +9.87%. Both gains will probably be larger than the total earnings gains for 2019, suggesting the market is looking for a good 2020.

Game Changers

• Lower interest rates and less binding loan covenants are likely to cause more bad loans.
• Only 42% of weekly prices are rising. Could we have deflation in goods and inflation in services and imported goods?
• Last week the interest rate offered to depositors went from 0.65% to 0.73%, suggesting that banks are increasing lending in face of slowing demand for products and services.

Global Mistakes

• The battle for dominance is essentially driven by defensive needs, not land or market dominance.
• The Chinese have been thinking in these terms for more than a thousand years. The earliest example of their well-developed thinking is in the writings of Sun Tzu entitled “The Art of War”. Jessica Hagy has produced a book that visualizes Sun Tzu’s thoughts. These should be understood by other world leaders and are shown below:
• Hold out baits to entice the enemy
• Feign disorder and crush them
• If your enemy is secure at all points, be prepared for him. If he is in superior strength, evade him.
• If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant.
• If he is taking his ease, give him no rest. If his forces are united, separate them.
• Attack him where he is unprepared, appear where you are not expected.
• These military devices, leading to victory, must not be divulged beforehand.
• The general who wins battles makes many calculations before a battle is fought.
• The general who loses a battle make but few calculations before-hand.

The Asia Times has an article entitled “China now has edge in Indio-Pacific”. It is based on a think tank report from an Australian group named United States Studies Centre. The study raises the question “Could the era of US military primacy in the Pacific be over? Their view is that internal conditions within the US suggests that it will not fully fund the needs of its National Defense Strategy. At the same time China is building a capability which in a surprise attack would destroy or cripple some or all of the US’s Western Pacific main installations in Guam and Japan. (Interesting that the report did not name our forces on Iwo Jima and in the Indian Ocean.)

My Point of View
As a former electronics, aerospace, broadcasting and conglomerates analyst, I have seen the power of small electronic components change massive companies and markets. The current “trade war” was designed to protect the primacy of our semiconductor technology, which is critical to both US and Chinese defense efforts. To paraphrase Admiral Alfred Thayer Mahan’s statement of Who controls the Seas, controls the world. I believe the two Emperors of China and the US are acting as Who controls (leads) semiconductors and related technology controls the defense of their countries.

An Important Question
Considering how long value focused managers have suffered, can we build portfolios that are able to survive a similar period, regardless of our investment strategy? Any thoughts?



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/08/short-term-recognitions-plus-longer.html

https://mikelipper.blogspot.com/2019/08/sentiments-approaching-reversal-points.html

https://mikelipper.blogspot.com/2019/08/is-last-week-significant-weekly-blog-588.html



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A. Michael Lipper, CFA

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Tribute to Frank Harrison - Weekly Blog # 535

We have lost our very good friend and the first editor of these blogs, Frank Harrison. He suddenly passed on to a place of less pain on Saturday night, July 21st. In the last week of his too short life he contributed to blog 533. At the request of his husband and partner of 40 years Mr. Maurice Lane, we delayed this announcement to his many friends and admirers.

Frank was an essential part of our old firm, Lipper Analytical. As our Chief Operating Officer he made things work for our valued clients and colleagues. Early in his career he was a school teacher for disadvantaged children in Newark, New Jersey. He used the same deep concern and patience with all our people. Frank played an important role in establishing our offices in Summit, NJ; London, England; and Hong Kong, where he developed lasting friendships. He also played a critical role in our original office in New York City and our data center and main product office in Denver. In many ways I either didn't know or fully appreciate how much he made my job in managing the firm easier and better. While he was working in NYC during the week he was commuting back to Massachusetts on the weekends. That became too arduous and feeling we could do without him, he found employment closer to what was now his home state of Massachusetts. We never could replace him.

About ten years after I sold the operating assets of the firm to Reuters, I started to write this weekly blog and asked Frank to edit and operationally manage it. He did a great job for ten years, both in his new "part-time" role and his former role as Chief Operations Officer. He was an excellent media ambassador for us, both domestically and overseas.

With Frank's wide circle of friends and admirers here in the US and overseas, my wife Ruth and I would like to celebrate his life and accomplishments. As Frank liked a party, we are planning one in his honor at the Princeton Club in New York, sometime in the early fall. If you and others that share our high regard for Frank would like details of the party, please email me at aml@lipperadvising.com.

Link to Frank's obituary https://www.currentobituary.com/obit/222721

As Frank would have wanted us to do, we must now turn to the primary mission of these blogs, which is to share various thoughts as inputs to our subscribers’ thinking as they address their investment responsibilities. I will share a few of the questions in my mind.


Thoughts to Ponder

1. Most people are focused on the economic (trade, non-trade barriers, taxes and currencies) plus defense positioning between China and the US. They may not have noticed that perhaps the real immediate battlefield is Europe, particularly with its alignment with Japan. As trade may become more restrictive between China and the US, there will be a shift to increase trade with Europe. As is often the case with increases in trade, it will be disruptive to the local market because some of the import prices will substantially impact locally produced goods and services. It is quite possible that the ensuing negotiated prices and arrangements will evolve into a framework for a series of agreements between the trade war belligerents. This may take some time and thus a series of quick agreements before the US mid-term elections may not be in the cards.

Those that have to agree to trade agreements are managed quite differently e.g. command/control, multi-decision power groups ( i.e. legislatures), and multi-national business and consumer parties (supply chains and marketing/distribution channels). In the end these commercial interests will determine the depth and quality of execution. These are big picture questions.

2. Because of what we buy and use we have become unwilling, multi-national participants. As an individual how do you protect yourself from the decisions that will be made above “one’s paygrade”. How do you profit? What preparation is needed for your children and grandchildren’s generation?


3. What are the penalties of downside and upside expansion of risk assets in your portfolio? I suggest that the penalty for the downside is withdrawing from planned future equity investments and the penalty on the upside is taking on more risk assets.

4. Will technology continue to be a disruptive and deflationary force through much lower prices?

__________
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Copyright © 2008 - 2018

A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.