Dead Cat Bounce > Last Chance - Weekly Blog # 952

 

 

 

Mike Lipper’s Monday Morning Musings

 

 Dead Cat Bounce > Last Chance

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

 

          

 

We appear to be in a normal trendless summer, with relatively low volume on hints of fall upsurges and declines. This poses a big risk for

investors with large gains in their portfolios who could be subjected to major moves from stampeding investors selling for fear of a big decline or speculative surge.

 

I am therefore suggesting that this is the time to build cash reserves so that you are in a position to take advantage of large future declines. The trick is to have a reserve large enough to shelter the portfolio from meaningful losses, but small enough to protect against being out of the game following the next rise. The next decline could be major and last for a long time, which might encourage those who have too much cash to stay out of the game. That is the real risk facing careful investors.

 

My suggestion is to treat your account as a long-term pension or endowment account with annual flows of about 10%. This would require a two-year buildup of short-term cash reserves under normal investing conditions. This suggests a target equity commitment of 70%, with a short-term reserve of 20% and an emergency reserve of 10%. The key to this strategy is avoiding a down market that reduces the equity commitment below 50%. One way to accomplished this is to begin an orderly reinvestment program in the declining market.

 

Reasons for Concern this Week

• The Consumer Confidence survey fell to 50.8% vs the expected 52.4%.
• Estimated GDP for the second quarter came in at +1.5%, below the estimate of +1.8%.
• Chinese tech stocks fell -8.6% in July. On Friday, Apple (personally owned) fell -7.4% on rising earnings.
• Barron's 10-year high grade bond yields slipped -0.03% while yields on 10-year mid-quality bonds rose +0.04%. (The bond market is more concerned about the future of the US Government and the currency than commercial credits.)
• There were 286 new highs and 189 new lows on the NYSE, versus 468 new highs and 692 new lows on the NASDAQ*. Suggesting there is presently more opportunity in industrial and financial stocks on the "Big Board" than tech-driven stocks on the NASDAQ. (*NASDAQ stock owned in managed accounts and personal portfolios)
• Warren Buffett is quoted as thinking the market is gambling, not investing. (In the past his general warnings have proven accurate.)

 

What Do You Think?

 

 

 

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Investors’ Interlude - Weekly Blog # 937

 

 

 

Mike Lipper’s Monday Morning Musings

 

Investors’ Interlude

 

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

 

 

 

Take Some Gains Before Taxes Do

The common denominator for most big investment gains are changes. Usually changes in investor perceptions and economic structural changes. The Standard & Poor’s 500 (S&P 500) and NASDAQ Composite are at record highs, due largely to enthusiasm for announcements related to the suspension of fighting in the Middle East. (This is not true for the Dow Jones Industrial Average (DJIA) and the average stock.  Unfortunately, since WWII the US has had a history of winning wars but losing the peace.)

 

We do not know the total cost of the war and other spending, including election-oriented payments. I suspect the President’s desire for a lower valued dollar will be achieved. There is also a strong push from urban legislators for “fair taxes”, also known as “tax the rich”. Thus, I believe capital gains rates and estate tax rates will rise.

 

Due to these expected changes long-term investors should review their portfolios to see how much of their wealth should be realized before their estates are taxed. If this generates significant amounts of cash, I suggest maintaining the cash or short-term treasury holdings for reinvestment.

 

I believe there will be positive changes in the foreseeable future. These changes may be driven by technology, demographics, immigration, and global factors. These changes are likely to be net larger than politically motivated changes and you want to be in position to take advantage of them.

 

Investment Impacts of Past Changes

The Founding Fathers were afraid of the powers of government, so they placed our Capitol in the humid swamp of Washington DC, thinking our legislators would desert the “swamp” during the humid months. That worked reasonably well until the development of air conditioning. The end of the government’s year is now September 30th, after the summer political conventions, which reduces the time for debating many of the critical issues of the day. DC is now a year-round city for government workers and legislators. Many work or live in large buildings constructed and possibly owned by real estate families who are probably wealthier than the US Senate members. Thus, the advent of air conditioning changed how our government works.

 

Another unexpected change was the railroad growth of the late nineteenth century. The highly regulated railroads only made profits on freight travel and lost so much money on human passengers that the federal government became the principal owner of passenger travel. The freight lines are governed by both the Department of the Interior and Anti-Trust laws. This has led to other countries having better and cheaper train service than we do, paid for by charges on the goods we consume. It is interesting to note that the Dow Jones Transportation Index, which covers the rails, was the best performing market index this past week. The rails are still important.

 

Future Changes

We live in an environment of an increasing rate of change. I leave to others to identify the changes which most investors would not be surprised by.

 

Geographic Changes

1. Western Hemisphere countries have become more partners than adversaries in terms of trade, health practice, external and internal defense, probably led by Canada.
2. Russia, after Putin, will experience major political and economic changes.
3. Asian countries that border both Russia and China will come into their own in terms of trade and be more open to development.
4. African countries will welcome joint development from Western countries.
5. Indonesia and India will become less autocratic, with foreign companies able to generate substantial sales and earnings.
6. Each country will make their own rules.

 

Retirement Issues

1. Over time, US Social Security will be allowed to exclude US government paper and possibly approach being a foreign wealth fund.
2. It is reasonable to expect that those born recently will live to at least one hundred, so we will need to provide for longer periods of investment and spending.
3. For the same reason, private retirement vehicles will need to change.

 

Market Regulation

1. Using the last trade may no longer be appropriate if it is too small and unrepresentative of the size of the seller.
2. As more stocks and possibly bonds trade in size in after-hours, having a closing price on the exchange market may be unrealistic.
3. From a technology perspective, there should be a body that can approve of their use for retirement accounts.
4. Should issuers of a certain size be required to have assets or insurance on the life of the CEO that can be used in retirement accounts.

 

As usual, I would love our subscribers to share their views with me. 

                                        

 

 

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Bifocal Analysis: Short & Long-Term - Weekly Blog # 933

 

 

 

Mike Lipper’s Monday Morning Musings

 

Bifocal Analysis: Short & Long-Term

 

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

 

 

 

Short-Term

The data is so negative that brief and violent rallies are to be expected. Net stock selling has consistently outpaced buying for each of the last four weeks. For example, 85% of the NYSE stocks and 81% of NASDAQ stocks fell in the latest week. As Barron’s noted “cash is looking more appealing since stock market hedges, bonds, and gold are no longer working.” Employers are barely replacing the more expensive retiring labor in most manufacturing functions.

 

There is a new player in the game, private credit. For the most part issuers of private credit instruments don’t qualify for bank loans, and they don’t have long credit histories either. Much of this paper is held in new funds, which are being sold to retail channels. When one of these loans gets in trouble it is referred to as a “cockroach”. Jaime Dimon, the CEO of JP Morgan Chase (*) warned that where there is one “cockroach” there is likely to be more.

(*) JPM shares are owned in managed accounts.

 

Market analysts are concerned that the S&P 500 Index has been locked in a narrow 300-point band for the last four months, with optimists and pessimist exchanging positions. This week, the lower boundary line was briefly pierced. If the “500” drops 3% more, then the 400-point range will become a difficult region for the market to rise beyond for quite a period. This fear may briefly spark some rallies from the derivative and short players.

 

Longer-Term Implications of History

One purpose of recorded history is to explain what happened, at least in the eyes of the winning survivors. The survivors, or their intellectual heirs, construct rules as to why certain actions are repeated. If there are enough repetitions the rules become dictum, even though the battle conditions are different. We are taught from a very early age to follow rules without an understanding of the conditions that created them. This blind acceptance of rules has led to occasional great mistakes in politics, the military, sports, families, business, and of course investing. Historic labels often become shorthand for rules. For instance: Adam and Eve, George Washington, the NY Yankees, Democrats, Republicans, Chopin, etc.

 

As has been noted before, I learned basic analysis at the NY racetracks. One great lesson from racing lore was Man of War, which had 25 winning races in a row but lost his last race to an unknown horse named Upstart. Proving unexpected things can and occasionally do happen. My self-appointed task at the track was to guess the chance of the unexpected happening.

 

Applying the racetrack experience to investing I looked at the historical record of Warren Buffett and Charlie Munger for stocks and companies in which to invest. In an oversimplification there were at least three characteristics the winners had in common, the nature of customers, the characteristics of the workforce, and the discipline of integrity. (I suspect the last was penned by his long-term counsel and director Ron Olson, a fellow ex-trustee of Caltech.)

 

If the US stock market does decline materially in the period ahead, I will try to apply the track lessons learned. Charlie Munger taught Warren Buffett it was better to buy a good company at a reasonable price and not wait for a cheap price. For many years there were great companies we didn’t own because they were selling way above a reasonable price. I expect a number of these “beauties” will be available at reasonable prices during the next depression.

 

Next Depression

I don’t know when it will happen but based on human nature, I expect it to happen. The US has had only four Presidents that were restructurers: Andrew Jackson, Teddy Roosevelt, FDR, and Trump. Below are some parallels to the 1930-1942 depression:

• Each challenged the constitution and fought with the courts
• Weakened the controls on the banks
• Set the stage for war
• Weakened the currency
• Encouraged the retail public to invest in speculative vehicles
• Changed how the US was governed
• All Presidents, except Andrew Jackson, were involved with Japan

No historical comparison is identical, and the future may be different than the past, but odds favor a closer similarity.

 

Please share your views, there is much to learn.

 

 

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Mike Lipper's Blog: This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932

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To Win Long-Term, Learn From Great Presidents - Weekly Blog # 928

  

 

Mike Lipper’s Monday Morning Musings

 

To Win Long-Term,

Learn From Great Presidents

 

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

Losing is Part of Winning

In the US, we celebrate Presidents Day on Monday. A typical US compromise that solved an immediate political problem and ignored the long-term implications that would have benefited all, particularly investors. Numerous Americans wanted to celebrate the birthdays of two of our greatest presidents, George Washington, and Abraham Lincoln. However, perhaps for economic reasons the political leadership decided to celebrate just one date, picking neither President’s birthday but continuing to support the travel and retail shopping industries by requiring Presidents Day always be celebrated on a Monday.

 

What these politicians lost in their efforts were critical learning experiences. In terms of opposed contests, both leaders lost more than they won. Washington in military battles and Lincoln in elections. Unlike many of us, they learned from these defeats. (As Warren Buffett said, losing is part of winning.)

 

Applying Learned Experiences to Portfolios

I learned a lot at the racetrack, but my objective was to finish with more money than I started. Washington wanted the rebellion to survive and by so doing he would force the superior power to concede defeat. (The British marched out of Yorktown to the tune “The World Turned Upside Down”.) Lincoln preserved the Union. Both Presidents needed selective reserves to accomplish their goals.

 

Applying these lessons to portfolios, I am a believer in taking risks on individual investments but avoiding the risk of a complete wipe out. In a study of million-dollar retirement accounts at Fidelity, the winning results used both stocks and bonds. I would rename the components equity risk and interest rate/survival risk.  

 

What I found interesting was the median account allocation of 70% stocks and 30% bonds for these millionaires.  Currently, I have about 70% in funds/direct equities and 30% in reserves, with about half of that in cash or bonds/notes under two-year duration.

 

The Logic Behind a 70/30 Portfolio

Looking through a collection of portfolios over time and dividing them into 10-year performance slices, it appears 80% of the equity slices go up in value. As a fiduciary, I assume a more conservative approach with the 70% equity risk.

 

I consider the overall portfolio to be a 20/20 portfolio, with the “normal” equity risk assumption being 70%. This permits market movements of 20% in either direction, without needing to change the basic balance. On the downside, if the portfolio balance reaches a point of having only 50% in equities, I would add 10% of capital to equities. On the upside, once equities reach 90%. I would rebuild a 10% optimistic reserve.

 

Not Built in Yet

We live and invest in a multi-speed world. Due to electronic processing most commercial and agricultural world price trends are impacted at an increasingly fast speed. Some of these trends reflect fast reactions to price movements, which cause geographic rotation. Through last Thursday on a year-to-date basis the S&P 500 generated a -0.07% loss and is essentially flat, with Europe gaining +4.51%, Japan +13.96%, Australia +3.8%, and Canada in local currency +2.56%. In most of these countries there are local and multi-national producers who experience similar problems of prices representing different costs, size-weighted efficiencies, local preferences, and legal/tax regulatory differences. Customers and investors are quick to rotate their actions.

 

On a longer-term basis the world is going through a period of declining fertility rates, impacting local demand in the short term. On a longer-term basis there will be fewer workers, which will result in retirement capital being reduced and securities markets altered. Organizations active in the markets are changing. On the one hand there is a desire to become bigger and serve more firms and people, while others want to increase profitability and remain small enough to grow profits per key player.

 

As populations age, they become more expensive to maintain, particularly beyond their working ages.

 

In Conclusion:

We should all learn from George Washington and Abraham Lincoln and adapt to change with sufficient humility, so we don’t become bystanders passed in the fast parade hurtling through.

 

Thoughts?

 

 

 

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Mike Lipper's Blog: Strategically, Time to Think Differently - Weekly Blog # 927

Mike Lipper's Blog

Mike Lipper's Blog: Failed Expectations: Do Details Count? Zig-Zag Flips - Weekly Blog # 925

 

 

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Biggest Investment Hurdle: Complexity - Weekly Blog # 913

 

 

 

Mike Lipper’s Monday Morning Musings

 

Biggest Investment Hurdle: Complexity

 

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

 

 

 

 

First Priority

An investment priority should be logging changes to your investment policies, although most investors do not maintain such records. To paraphrase the late and great Charlie Munger said that Warren Buffett was a learning machine. His point was, Warren benefited from the losses he sustained. He had an investment history of making very few repeated mistakes.

 

Most profitable investors also make relatively few mistakes, in part due to most mistakes forfeiting more opportunities than money. To avoid future mistakes, it would be helpful to have an insightful roster of mistakes. The real painful mistakes are repeaters.

 

Tools of Repeating Errors

Many repeating errors of judgement rely on an automatic mathematical response. For example, if “x” happens then do “y”. This is a non-thinking action. It does not adjust for changes in critical conditions that might impact the current situation.

 

On a very basic level, buying is different than selling. Investment buying is often based on market prices being wrong but are likely to change soon. The seller on the other hand believes in the relative attractiveness of a security that will shortly decline in price. In both cases the investor believes that he/she is ahead of the bulk of the investment market. These are the actions of someone who wants to be among the leaders.  This is in direct conflict with successful investors who prefer to be lonely and contrary to the crowd.

 

Understanding Complexity

Berkshire Hathaway (*) developed a system of categorizing new investment information into three buckets, “yes, no, too hard”. Berkshire’s advantage was structured on the combined experience of the late Mr. Munger and Mr. Buffett. This experience included knowledge of over 60 different companies they owned and the knowledge of various securities they previously owned or looked at for more than 100 years combined. Where most others saw complexity, they saw investment opportunity.

(* Berkshire Hathaway shares are owned in client and personal accounts.)

 

Can’t Avoid Complexity

In the modern global world, one cannot avoid complexity. However, with some hard work and experience you can reorder many elements into positives, negatives, and judgements to be determined. With this structure one can put odds on each critical item, leading to a preponderance of positives or negatives worthy of action.

 

An example of factors that surfaced this week in the media are shown below:

• Wall Street Journal Headline “Foreign Stocks outperform S&P…”. This could cause many US accounts to add foreign stocks and funds. However, the largest collection of stocks that Americans buy are multinational stocks listed overseas. In many cases the largest portion of these portfolios are invested in US operations, which is a negative if your purpose is to participate in European and Asian growth. (The same could be said about US listed multinationals with significant sales abroad. This includes Coca Cola, a large holding of Berkshire. The same could be said about Apple.)
• The Federal Reserve is concerned about a bifurcated economy consisting of technology and older companies. Both sides have significant foreign sales.
• This may be the wrong time for the proposed cut in bank supervision. Both banks and non-bank financials are increasing loans to lower-quality companies.
• While some believe oil is being priced attractively, natural gas prices are even more attractive. Also, Copper has historically performed better than gold.
• The “Buffett Premium” is disappearing just as insurance driven earnings are very strong.
• Cash in portfolios should be used in the short term, either as a basket to buy favored stocks or to reduce exposure to over-capitalized companies and increase return on equity.
• In latest week there were more declining stocks than rising stocks.

 

Each of the mentioned items could be attractive buy or sell opportunities, depending on one’s view.

 

What do you think?

 

 

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Where Are US Stock Prices Going? - Weekly Blog # 911

 

 

 

Mike Lipper’s Monday Morning Musings

 

Where Are US Stock Prices Going?

 

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

 

 

 

Time to Achieve

The old rule for publishers regarding future projections is to never state both a target number and a date certain. However, the result of that warning is a relatively useless projection for planning current actions. Unfortunately, I have views on both the target number and approximate timing, although neither are precise nor tied together. In this blog I share my thoughts with the hope that some are of value, and our trusted readers will share what they think are reasonable answers.

 

As a racetrack trained analyst, I believe the odds favor the US stock market reaching a multi-year peak in the foreseeable future. Consequently, my grandchildren and great-grandchildren will likely see nominal gains in their assets long-term. Careful readers will quickly surmise that I must have mixed views regarding my children’s market wealth prospects. Their results will be heavily influenced by their controlled spending and financial diligence, and what they want to leave to their heirs.

 

Current Market Dilemma

Most of the time a single investment attitude drives market prices. Today, there are two dominant thought patterns. The first is enthusiastic buyers who largely believe the President is in the process of restructuring the economy and therefore society. However, he is at a disadvantage of having only loyalists support him. (Loyalists generally do not pursue details of potential execution problems or even try to identify them to reduce political, functional, and court issues.) They think things are going well.

 

The second group is reluctant to make decisive decisions in the market. The $8 trillion in money market funds is one measure of their non-acceptance of things going well. Cash or similar investments are both a repository for normal operating reserves and future buying pools.

 

Incomplete Evidence

• Tariff impact: Consumers 55%, importers 22%, foreign producers 18%, and 5% evaded. (I suspect until tariffs are removed consumers will pay at least 90% of them, either in aggregate prices and/or in quality/quantitative shrinkage.)
• While the media and uninformed public focus on the Dow Jones Industrial Average (DJIA) and New York Stock Exchange (NYSE) volume and prices, they are missing a critical change in stock market structure. The year-over-year share volume has increased 40.88% for the NYSE and 80.55% for the NASDAQ, effectively double. (To some degree the NASDAQ volume includes inter-dealer trades to restore trading inventory positions.) Sometimes the two markets act differently. For example, on Friday the NYSE volume of advancing prices rose, as did total volume from Thursday. However, NASDAQ activity was the opposite, with lower volume and more decliners than gainers. A larger measure of the market is the Standard & Poor’s 500 (S&P 500), which is very near an all-time high.
• In the weekly survey sample of the American Association of Individual Investors (AAII), the percentage of respondents predicting a bullish market for the next six months dropped to 33.7%, while those predicting a bearish market rose to 46.1%. Just three weeks ago the ratios were 42.9% vs 39.2% in favor of the bulls.
• The current market and political situation resemble those of the late 1920s, which led to both the recession and depression. Both started with an overall increase in debt at the individual and business level. This was particularly true in the politically sensitive farm community, which was suffering from a change in foreign demand for its crops. (This time it’s a Chinese decline in demand for soybeans.) Small and medium-sized banks were having loan payment problems, which then led to imposing tariffs on foreign products and services. The current Federal Reserve Board is very conscious of this history.
• Another parallel is certain foreign governments recognizing the relative weakness of America and taking advantage of the situation by threatening further actions. This week Ruth and I spent time with the leaders of the US Marine Corps University who are preparing for a future different than the past. Similar efforts occurred before WWI and WWII, suggesting investors should think about structural changes to their investment policies.

 

Building a larger cash opportunity reserve may make sense. What do you think?

 

 

 

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Mike Lipper's Blog: A Good Time to Sell? - Weekly Blog # 910

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Mike Lipper's Blog: Tactical Headlines Show Strategic Clues - Weekly Blog # 908

 

 

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Rising Risk Focus - Weekly Blog # 900

 

 

 

Mike Lipper’s Monday Morning Musings

 

Rising Risk Focus

 

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

 

 

 

                 

Friday’s Four-Letter Word

In polite society we are encouraged to limit the use of four-letter words. This could be the reason we try to not use them in the financial world, which is a disservice to our performance analysis and investment achievements. Thus, I am dedicating our 900th blog to articulating the key to our investment survival, risk.

 

Risk is the penalty for being wrong, although it is also critical to winning. Without risk there would probably be no rewards for winning. As Lenin said, “There are decades where nothing happens; and there are weeks where decades happen.” It is possible last Friday was one of those weeks. After an extended period of “melt-up” from mid-April, stock indices, driven by a minority of their stocks, fell by large single digits or more. The media attributes the decline to employment.

 

Employment

Employment encompasses both large and small numbers of people, including us. The impact of employment is much broader than the number of people being paid to work, it influences both production and sales. (In the modern world published data does not include people who work without pay. Furthermore, there is no published data on the quality of the work done, nor the quality of those who wish to be hired. For current employers with open job positions, it is the absence of the last unknown factors which raises serious questions concerning the likelihood those open slots will soon be filled.)

 

One problem with the employment data is that only about 60% of the organizations report their numbers to the government on time, catching up in subsequent months. Thus, adjustments are normal. The current period includes the fiscal year ends for state and local governments, end of teaching year, and the federal government shrinking its totals. Regular users of this data probably understand these issues and adjust their thinking accordingly.

 

Bond Prices

Many businesses, governments, non-profits, and individuals generate insufficient revenue to pay for their purchases each and every day. To the extent they lack sufficient reserves of idle cash, they often borrow. Depending on their size and credit worthiness they will use the bond or credit markets. Unlike equity which has an indefinite life, bonds or credits have identified maturities. Consequently, the providers of cash are very focused on the short-term outlook of the borrowers. Each week Barron’s publishes a couple of useful bond price indices, consisting of ten selected high-grade and medium-grade bonds each.

 

Barron’s found another use for this data when they discovered that medium-grade bond prices rose more than high grade bond prices within a year of the stock’s price rise. Stocks decline when bond investors favor high-grade bonds. On Friday, high-grade prices didn’t move while medium-grade bond prices fell (yields went up). This is a negative prediction on the future of the stock market.

 

The negative view is understandable, many of these credits belong to industrial companies. Another source of information is the ECRI, which publishes an industrial price index which tends to move slowly. However, by Friday that index had risen 3.6%, which will increase inflation. (I assume it was the result of the announced level of tariffs.)

 

Questions

Has the Administration in their planning adjusted their expenses for the enforcement of tariffs? I wonder if we will see increased smuggling across our borders if the tariffs stay on for long? Are we increasing the Coast Guards’ budget?  How much will Scotch sales decline and Bourbon sales rise?

 

Please share your views.

 

 

 

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Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

 

 

Mike Lipper’s Monday Morning Musings

 

Analyst Calendar: Preparation for 2026

 

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

                             

 

 

Analysts should attempt to get ahead of the stock market. Starting next Tuesday, we are entering the second half of 2025. Using the performance of Large-Cap US Diversified Mutual Funds as a broad indicator of the experience of US investors, the first quarter of 2025 was relatively strong, but April’s second half was weak. Perhaps it was due to concerns about taxes, tariffs, and international turmoil. The Market slumped into June, then recovered through the final four weeks of the quarter, bringing average performance back to mid-single digit gains, with half in the last week, despite a 9% decline in the value of the dollar. Not a great foundation for the continuation of two 20% gaining years.

 

Starting next week, analysts will quietly begin gathering their thoughts on preparing forecasts for the next calendar year. For the most part they will not have the benefit of the proclaimed or quietly guided company estimates. The estimate for 2026 will be more difficult than prior years. Not only will there be comparisons of two 20% plus years, but it is also unclear what taxes, tariffs, and the value of the US dollar are likely to be. There are two other quandaries that should be addressed. We have entered a period where there is a shortage of necessary talent at companies. For tech companies there is a struggle to find AI personnel at prices approaching Wall Street levels. Industrial and service companies have approximately 400,000 open positions, despite many announcing plans to lay-off workers. To some degree, this speaks to the quality of present workers and their attitudes.

 

Another concern is the level of IPOs threatening private equity portfolios with unattractive opportunities to sell some of their holdings. These sales are necessary to raise sufficient cash to pay the dividends expected by present holders and retail buyers. Private markets could contract quickly, constricting private securities firms. An investment trend is normally near the end of its popularity when it becomes dependent on retail buyers.

 

The answers to these questions may not be determined in the third quarter. Even though the fourth quarter is the second highest selling period of the year, it may not provide quick answers for marketing forces expected to produce results.

 

It is possible the market may be saved through efforts in the unofficial “fifth quarter”, which can deliver either surprisingly good numbers or poor ones, setting up a splurge in the first quarter of 2026. These will rely on the increasingly popular “adjusted” sales and earnings per share numbers created through skilled accounting approaches. These are often approved by the firms’ accountants and are not objected to by the regulators.

 

The problem with this exercise is that it makes the following year more difficult for analysts and investors to understand the base for the real earnings power of the company next year.

 

Buyers be thoughtful.

 

 

 

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Mike Lipper's Blog: Inconclusive Week Hiding a Big Problem - Weekly Blog # 894

Mike Lipper's Blog: We may think we manage time, but time manages us - Weekly Blog # 893

Mike Lipper's Blog: Selective Readings of Data - Weekly Blog # 892

 

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“Hide & Seek” - Weekly Blog # 880

 

 

Mike Lipper’s Monday Morning Musings

 

“Hide & Seek”

 

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

 

                             

 

Friday’s Victory Signal?

After an extended period of stock price declines, prices shot up on Friday. The “Bulls” hoped it was the beginnings of a “V” shaped recovery, but some market analysts were skeptical. A strong move often ends when there is a 10 to 1 ratio between buyers and sellers, which was the case with Friday’s 10 to 1 ratio.

 

The Wall Street Journal publishes “Track the Markets: Winners and Losers” in their weekend edition. It tracks the moves of 72 index, currency, commodities, and ETFs weekly. It may be worth noting that only 35% rose for the week.

 

The Second Focus

The media, and therefore most of the public focus on daily price changes. Even with the growth of trading-oriented hedge funds and the conversion of former securities salespeople into fee-paid wealth managers, the portion of the assets invested in trading is less than the more sedate investment accounts invested long-term for retirement and similar institutional accounts. My focus is on the second type, which includes wealthy individuals.

 

The Current Administration is Ignoring Us

The first step in security analysis courses often starts with reading what the government puts out in order to develop a foundation for an investment policy. The current administration is the most transactional in memory. The President, Vice President, and Sectaries of Treasury and Commerce made and lost money on market price changes. This has forced me to find other sources to build our long-term investment philosophy.

 

Inevitable Recessions

Studying both recorded history and our own lives, it tells us that life does not move in straight lines, but in cycles of irregular frequencies and amplitudes. Simplistically, we can divide these movements into good and bad periods. However, an examination of the periods reveals differences in how each period affects us. The differences and how they affect us depends on where we begin each cycle, the magnitude and shape of the cycle, and any surprises along the way.

 

Both up and down cycles are caused by imbalances within their structures, which often occur due to other imbalances known or unknown. Most importantly, any study of cycles indicates they happen periodically and surprise most participants. Even with detailed histories of cycles they can be difficult to predict, although the root cause of most cycles is extreme human behavior.

 

While some cycles are caused by natural weather-related events, most economic cycles are caused by envy and/or too much debt. I am perfectly comfortable predicting a recession will hit us, but don’t know for sure when it will occur. (In a recent discussion with a small group of senior and/or semi-retired analysts, they felt there was a 65% chance of a recession within 12 months.)

 

The fundamental cause of cycles is often the result of people reaching for a better standard of living through excessive use of debt, which often results in a struggle to repay debt and interest. At some point the growing federal deficit, combined with growing consumer debt, as evidenced by credit card delinquencies, will force a decline in spending. Reduced spending will lower GDP and production. The fact or rumor of this happening is enough to bring securities prices down.

 

Confusing Hide and Seek

Hiding is not the solution to avoiding a loss of purchasing power, both actual and supposed. Cash is the only true defense, although it is not a defense against inflation which reduces the purchasing power of most assets. However, the biggest long-term loss from hiding is foregoing future potential high returns.

 

Our Approach

I believe a cash level no larger than one year’s essential spending should cover the crisis bottom. Most of the remaining capital should be devoted to seeking out substantial total returns that can produce multi-year gains.

 

Where are these Gems?

Bargains are usually hidden in plain sight. One example might have been the fourth quarter 2024 purchase of European equities, which were priced for a European recession. However, European equities actually generated expanded earnings from Southeast Asia, Latin America, and Africa. (In a recent discussion with one of the largest investment advisers negative on investing in Europe. Their views were based on their continent’s own economics, while paying insufficient attention to companies growing profitably in the aforementioned regions)

 

Thus far in the first quarter I have been lucky enough to own both SEC registered mutual funds and European-based global issuers. (It took patience because earlier performance periods were not good.) This shows the need to be courageous when seeking future bargains. 

 

We would appreciate learning your views.

 

 

 

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Mike Lipper's Blog: Separating: Present, Renewals, & Fulfilment - Weekly Blog # 879

Mike Lipper's Blog: Reality is Different than Economic/Financial Models - Weekly Blog # 878

Mike Lipper's Blog: Four Lessons Discussed - Weekly Blog # 877

 

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Lessons From Warren Buffett - Weekly Blog # 852

 

         

Mike Lipper’s Monday Morning Musings

 

Lessons From Warren Buffett

 

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

 

 (Many subscribers will receive this blog on the regular Monday schedule, but some distributors are taking Monday off, so you may not see this blog until Tuesday.)

 

 

As Often the Case, Media and Other Pundits Missed the Opportunity to Learn 

The August 29th New York Times headline stated, “Berkshire Hathaway Hits $1Trillion in Market Value”. However, the headline was essentially a current events piece, which missed an opportunity to plum Mr. Buffett’s actions. In so doing, they learned no lessons from his current and historic activities derived from an extremely successful professional investment career. 

 

Caution: Bias at Work 

Berkshire Hathaway is the largest position in my personal accounts. Perhaps more significantly, I share a responsibility with Mr. Buffett, I manage money for personal accounts. We are not managing money for our own benefit, but for our heirs. In my case, it begins with starting to care about the fourth generation. 

 

This orientation leads to largely investing strategically, which means positions are permanent unless conditions change materially. This desire separates Mr. Buffett and me from most professional/individual investors who are more focused on tactical approaches. Most investors react to sell signals, while we focus on disappointments as a need to re-underwrite. We hope to add to our holdings at cheaper prices while extending our holding period. 

 

Strategic Diversification 

Changes occur at different times for different opportunities, making it wise to take advantage of changes with different tools. While Buffet is always looking for lasting value, he has found a way to take advantage of these situations with different tools.

  

Berkshire was initially mostly a buyer of cheap stocks selling below book value, which worked reasonably well coming out of the depression. The focus changed to buying good companies at fair prices when Charley Munger came on the scene. As fairly priced securities became scarce and Berkshire’s assets grew, cheap assets were to be found in the private assets of whole companies. After a few mistakes they learned how to pick winners.

 

For many years the wholly owned companies were larger than the publicly owned and publicly traded companies. Within this collection of companies there were a few insurance companies, including GEICO and other casualty insurance companies. The primary attractiveness of these companies was “the float”, allowing for the use of client cash before it was needed to meet claims. The insurance assets grew, and they hired very talented people to underwrite very large risks. Most casualty insurers were risk adverse, but Berkshire looked at insurance risks as opportunities at very high rates. On balance the rates were larger than the risks, which allowed for large, long-term “floats”. The final, or perhaps the first type of asset was cash. 

 

Cash, the Intermediate Asset 

Most investors treat cash as the ultimate reserve asset, but not Warren Buffett. After segregating Berkshire’s $100 billion in US Treasuries, he devoted the remaining cash pile to acquisitions. Buffet recently sold 50% of his Apple stock and enough of his Bank of America stock to drive it below 5% of its outstanding stock value. He did not buy any of his own stock with the proceeds. (I suspect he has converted more of his assets to cash.) 

 

I have stated that these moves are the most “bullish” indicators I have seen. I don’t know whether this cash will be used for the acquisition of a private company or a publicly traded stock. I have been told he has made some offers, but he has been outbid. When the market breaks, his cash will become more valuable. 

 

Some other Buffet lessons are useful in building a picture of how his mind works: 

• Losing is part of winning 
• Cash is not king 
• It is okay to change 
• Buy businesses, not CEOs 
• Don’t buy art as an investment, buy it for pleasure 
• There is no such thing as growth or value stocks as Wall Street generally portrays as contrasting asset classes. Growth stock is part of the value equation. 

 

 

Question: Are you utilizing any of Buffett’s lessons? Which do you disagree with? 

 

 

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Mike Lipper's Blog: Understand Numbers Before Using - Weekly Blog # 851

Mike Lipper's Blog: The Strategic Art of Strategic Selling - Weekly Blog # 850

Mike Lipper's Blog: Investment Second Derivative: Motivation - Weekly Blog # 849

 

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Better Investment Thinking - Weekly Blog # 832

          

Mike Lipper’s Monday Morning Musings

 

Better Investment Thinking

 

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

   

       

 

The late and great Charlie Munger gave Warren Buffett his greatest compliment when he called him a “thinking machine”. His compliment implies that Warren is always thinking and trying to improve his investment process. In last week’s post-script at the end of the blog I introduced the concept of needing to focus on the process of selling. Early this week I had a conversation with one of the more perceptive members of a monthly investment discussion group. He was concerned that they hardly ever discuss the process of selling.

 

Selling is often prompted by the need to raise cash or the need to free up cash for reinvestment. Currently, we have quite possibly entered a period where it would be prudent to develop a meaningful cash reserve for later equity reinvestment. Admittedly, it runs the risk of not fully taking advantage of the rising stock market.  It is with that thought in mind that I am introducing the thinking of Professor George M. Calhoun, with some concern as to the structural risk it might expose.

 

George’s views have been shaped by the following experiences.

• For 25 years George worked for various tech companies.
• He is a Professor at The Stevens Institute of Technology, where I am one of the trustees.
• At Stevens, George supervised the development of the Hanlon Financial Center, a live trading room.
• He won a National Science Foundation award for creating the Center for Research Toward Advancing Financial Technologies (CRAFT).
• George is a regular contributor to Forbes.

George Calhoun has written extensively on the causes of inflation, in discussions on: Dangers created by Money Market Funds, Cash Shortages, Recession Signal, Dry Powder, and Contrarian Indicator, parts of which are included in the link to the article below.

 

 

Collateral Damage From Fed Policy (3) – Money Market Funds, A ‘Powder Keg’? (forbes.com)

 

 

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Mike Lipper's Blog: Preparing for the Future - Weekly Blog # 831

Mike Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830

Mike Lipper's Blog: Fragments Prior to Fragmentation - Blog 829

 

 

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