Inputs to Implications - Weekly Blog # 797

 

Mike Lipper’s Monday Morning Musings

Inputs to Implications

 

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

 

The Use of Inputs

There is a known cure for the narcotic attraction of investing. We can’t help but view any inputs as possibly having implications for our investing deliberations. The best we can do is to quickly review the plethora of daily inputs and reject most as unimportant, or alternatively sent to Warren Buffett’s desk basket, labeled “too difficult”. With that thought in mind, the following inputs and possible implications crossed my mind this week. See how many you can reject and how few are important enough to require your further research. Alternatively, you can send me your questions.  The inputs below are in the order they reached my consciousness, not of their level of importance.

 

Inputs & Implications of August 13^th week

1.  The Value of Competition: On the surface regulators see vigorous competition as the best way to achieve the lowest price for consumers and the highest wages for workers. For the long-run sake of society, the primary value of appropriate competition is the evolvement of a sector that can sustain itself and develop useful new products and services.

 

Implications: Placing a priority on competitive prices, wages, profitability, research, and national security, will likely hurt other players in the industry. No single force seems bright enough to allow for the enthronement as a Czar to oversee the industry. History suggests that mandatory leadership does not work. The best results are achieved when those involved compete against each other and let the marketplace decide the outcome.

 

2.  Input of what is the market is saying. Most of the time there is not a single market and therefore a single market index is not that important. In an overt simplification of markets and indices, you can use the following generalization to see what each of the markets is saying.

 

The Dow Jones Industrial Average (DJIA) is the most followed by individuals getting their market views from local media and politicians. The importance of the index is its reflection of votes, not dollars.

 

The Standard & Poor’s 500 is the single most important index for investment institutions and corporate managers. The latter group is often incentivized by its own stock or industry relative to the index. Institutional investors are conscious of the flows into and out of their portfolios relative to the index. The SPX is often used as a forerunner of employment trends.

 

The NASDAQ Composite is useful in measuring the level of speculation in the market, as it generally tracks the performance of younger and somewhat smaller companies. Most speculations are based on the belief that the future of the stocks within the index are improving. That is why the index has been more volatile in recent years, with up and down tends moving faster than the other indices.

 

When discussing “the market” with someone, the first market measure they mention tells me what kind of investor they are. People see “the market” differently, and while the main elements of the market move at different rates, a good bit of the time they mostly move in the same direction.

 

3.  “Pro Inflation” input. Very few people are publicly in favor of rising prices, although their specific actions push prices higher. Truckers, autoworkers, pilots, and other Teamster’s unions are among those pushing prices higher.

 

Considering the low productivity of businesses and non-profits, a meaningful wage increase will lead to higher prices and generally worse services. The current administration’s restrictions on energy production, onshoring, the mandating of employment practices and union membership, add to inflated prices at the consumer level. The implications are that the movement of interest rates will not be enough to sufficiently bring down long-term inflation.

 

4.  Standard & Poor’s is no longer using ESG ratings in assigning credit ratings. (I wonder whether they should actually include it as a negative, reflecting the negative consequences of a company that puts social spending ahead of its obligation to bond holders, stockholders, and fellow local and national taxpayers.)

 

5.  China’s export and import numbers have declined meaningfully. Some of it is due to US government policies. Is this wise from a purely US standpoint? (It could be as disastrous as FDR’s prohibition on US companies selling petroleum to Japan in 1933, after they were precluded from the carving up of the German Asian colonies.) China’s imports of US goods are paid for from their export earnings. There is also a risk of China dumping products on the markets of our “European allies”. Implications are that the US is reverting to isolationist policies, following a war that is the preamble to the next war.

 

6.  Input: More than half of young Arabs in North Africa and the Levant are considering leaving their homes in search of better jobs. Implications: This desire is similar to those in China and many youths in the US who are also in search of well-paying jobs. This appears to be a global demographic urge. Arabs are part of this urge even though one of the stock market indices produced by Dow Jones Standard & Poor’s is labeled Islamic Technology.

 

The youths want good jobs and employers want good workers. I wonder whether it’s a global problem concerning the lack of sufficient rigor in their home, schools, or even religion? Discipline, respect for others, and following rules could be a global issue that makes future progress more difficult.

 

7.  Input- the stock markets appear to be having a bout of complacency, with the VIX declining 14.84 this week vs 17.10 the prior week, and 19.53 a year ago. We used to think of the 30 level as normal. The bond and credit markets seem concerned about risk in the near term, with the continued inversion of higher Treasury yields for 2 years vs ten or thirty years. All of them are in the 4% range.

  

Implications: Permanently higher interest rates with the level of risk about equal through the whole long period. As a student of history, I have my doubts. I suspect too many investors are focused on current conditions extrapolated to the indefinite future.

 

8.  Every large country regularly prepares for future offensive battles and defensive wars. China follows this pattern. Two indications: A Chinese national serving in the US Navy on an armed amphibious ship was caught selling photographs of critical equipment to a Chinese agent. (As a USMC Combat Cargo Officer, I served on an armed troop amphibious ship. I believe that if China attempts an opposed amphibious landing on Taiwan, it will need a number of such ships and an experienced crew, both on the ship and on landing craft.

The US has two army type forces, the regular army, and the reserves/National Guard. The Chinese have a similar set-up, with their Militia normally assigned defensive tasks. They are however receiving training in the use of drones and other more aggressive functions. This suggests the main army will have other responsibilities or will need replacements for some of their people that are wounded or killed.

 

9.  How different is the level of investment performance compared to that in the past? One thing I do each week is to look at the performance of the 25 largest long-term mutual funds. Going back to 1926 the S&P 500 grew about +9% per annum, without any deductions for expenses and transaction costs. How does that compare to fund performance?

Of the only four funds which gained between +10.08 % and +14.33%, three were passive and one active. Three fixed income funds were slightly negative. The remaining funds gained between +6.41% for a value-oriented fund and +8.66% for a large-cap growth fund. The bulk of large equity managers produced returns in the mid +7% range, which was somewhat behind the passive index before adjustments. The implication of this analysis is that it may be appropriate to use +7% as a goal for large-cap institutional money.

 

Working Conclusion

Stock Market investors are not incentivized to change their portfolios, while fixed income investors attempt to price in credit and market risks.

 

How many of the implications are real and/or likely?

The following table may help you focus.

Indication            Implication            Accurate            Important for investment  

1.    Competition

2.    Market indices

3.    Pro inflation

4.    ESG, positive or negative

5.    China

6.    Attitudes of youth

7.    Complacency & worry

8.    Preparing for war

9.    Long-term equity expectations

I'd be delighted to learn your views.  Please let me know.

  

 

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Mike Lipper's Blog: Markets Are Time Frame Exchanges - Weekly Blog # 796

Mike Lipper's Blog: Possible Investment Lessons - Weekly Blog # 795

Mike Lipper's Blog: Cross Winds - Weekly Blog # 794

 

 

 

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Pick Your Bias and Selective Data Will Support - Weekly Blog # 630

Mike Lipper’s Monday Morning Musings

Pick Your Bias and Selective Data Will Support

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

Different investment horizons favor different inputs. One can be reassured that I regularly search through lots of data as inputs to making investment decisions.  There currently appears to be a tug of war between the inputs that please bulls and bears.  We manage money utilizing different investment horizons and what I am seeing may be useful to our subscribers.

Short-Term
Positives:

1. The “fear index” for short-term trading is slowly falling, currently reading 28 compared to 32 and 36 respectively for the last two weeks. However, it is still elevated compared to last year’s 16.
2. The S&P/Dow Jones roster of global stock market indexes shows 29 of 32 rising.
3. A list of weekly prices that includes various domestic equity price indicators, commodities, and currencies, shows 79% rising. 

Negatives:

1. Taxable bond fund net sales, while still positive, fell a bit. (This is viewed as a negative indicator, much like the old net odd-lot transactions being right for a while, but wrong at most turning points, often confirming them.)
2. A relatively low level of overall stock transactions possibly suggests that some traders and investors are starting their low-volume summer vacations. (The absence of high-volume market followers indicates a lack confirmation signals.)

Many active equity Mutual Funds focus only on their long-term investment objectives and are not very sensitive to changes in market direction, or even the direction of flows into or out of their funds. The first quarter, plus a glance at April, was an interesting petri dish. We did a small confidential survey of a limited number of active stock funds in some of our client accounts, which showed the following results:

1. Half of the funds enjoyed positive net contributions.
2. Approximately 30% owned 200+ names, 50% had 50-100, and 20% held below 25 names.
3. Remember, February saw a high point and March a low point for this cycle, but only 20% chose to make dramatic changes to their portfolios. In each case they actively reduced some risky positions, but generally replaced them with the same number of names.
4. Most of the funds used their existing holdings to allocate new money to and used them as a source for redemption proceeds. Thus, they stayed within their expected portfolio envelopes.

The useful observation from the small survey is that many active funds are worth a premium management fee and should be used as long-term vehicles to meet long-term needs, not short-term instruments to play the market.

Intermediate Term

1. Many international or global funds view the world from a European perspective, based on the size of the market and value of the assets listed on their stock exchanges. Companies in Europe were the first to become multinational, beginning with their investments in the Americas. Today, Europeans are much more dependent on both their imports and exports with Asia and Africa, than US companies. Thus, when US investors buy into a European multinational they are buying into China, etc.
2. Over 60% of Asian trade now remains within Asia. From a trading and investment perspective, Asia is becoming as integrated as Europe, without the bother of an overall government. Today, Asian economies are almost fully recovered from the Coronavirus, whereas the US and Europe are not.
3. The Baltic Dry Cargo Index is rising and is currently slightly less than half of last year’s level, which I take as an indicator of the Asian recovery.

Longer-Term – The Major Concern, the “New Normal(s)”
We are handicapped in our thinking by out of date ways of assembling and characterizing our data. For example, we separate governmental activities from services provided, but don’t identify total government wages and service revenues buried in goods manufacturing. Thus, much of business and the whole political structure is coming to a gunfight with a rusty knife. The “new normal” will likely force some corrections. Our job as investors is to be a bit early to these changes. As usual, the change agent will be uncomfortable prices.

The first wave of COVID-19 has wiped out many family’s cash savings and put many domestic governments, educational institutions, and critical non-profits in jeopardy. In addition, it has added to our unemployment and increased the swelling group of young people looking for jobs. At the other extreme, because of travel restrictions and working from home, some businesses have increased their cash levels. This has also occurred for some wealthy families.

Our political leaders have a long-term view, all the way to early November, and are focused on goods manufacturing employment in a half dozen states. This is where their problem lies, it is not where the bulk of the people are. Local and state governments provide many services to their citizens/voters and I fully expect almost all to institute fees for the services provided, substantially raising them above what they already charge, possibly with a poverty discount. Rainy-day reserves will need to be quickly restored before additional waves of this plaque hit. It will likely include a reasonable reserve for future plagues in this overcrowded globe. (It is quite possible, due to neglect or political patronage, that some of these services can be outsourced to more automated and friendlier companies.)

Bottom line, the cost of government will be going up
The average 5-year return for diversified equity mutual funds through Thursday night was 5.13%, with the average domestic and international fixed income fund earning less than 3%. I doubt that most employers are earning much higher on their retirement responsibilities. This suggests they are not earning their cost of capital, regardless of what they say, and is the reason they have not been expanding in the US. Additionally, while many companies already charge for services after the initial sale, many do not, or charge prices that are too low to cover costs.

I expect prices charged by business, like those of government, will rise in the future. Others have doubted this because of the large number of unemployed, but some at the low end will be employed at wages below the cost to automate. Unfortunately, this period of “go to shelter” has exposed many middle management types in the post 40-year age group who were good enough with full employment, but are now no longer needed. These are nice and good people and some will find employment at considerably lower wages, or take on entrepreneurial risks themselves.

There are upsides to these views. First, people at all levels will learn to budget both their time and money. We are already seeing the personal savings rate rising, but this is initially used to pay back debt. Further, while automation will reduce some jobs, technology will create many more as it addresses existing and new problems.

I expect prior to the end of the next Presidential term to see inflation in the 3-7% range and interest rates perhaps 2% higher, with average equity returns 1-2% higher than interest rates. This should be a good long-term return for stocks and stock funds. A predictor of rising inflation is that gold mining stocks are rising but the metal price is flat. The latter is discounting the future value of gold after significant costs.

Working Conclusion:
In each problem there is at least one or more opportunity, if we are smart and flexible. Investors with these capabilities should see opportunities a bit earlier.   



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https://mikelipper.blogspot.com/2020/05/time-to-review-investments-weekly-blog.html

https://mikelipper.blogspot.com/2020/05/top-down-sells-bottom-up-pays-weekly.html

https://mikelipper.blogspot.com/2020/05/mike-lippers-monday-morning-musings.html



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Top Down Dictums Measured Digitally Are Not Designed to Win - Weekly Blog # 601

Mike Lipper’s Monday Morning Musings

Top Down Dictums Measured Digitally Are Not Designed to Win

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

Author's note
After producing our 600th blog I was prepared for more of the same numbers-oriented thought processes. However, life is full of surprises and mine included spending the last five days as a patient in the Overlook Medical Center in Summit, New Jersey. I was a victim of the Adenovirus F 41/42, which is somewhat like Pneumonia, but different. During my many sleepless nights I thought about the life lessons from my experience in the US Marine Corps and as a junior analyst at a trust bank. Those experiences helped prepare me to recognize the mistakes made through top-down decision making using digital analysis.

There is hardly an organized force today that does not mandate total compliance with the words and power delivered from those at the top to those  on the bottom. Usually, this means segregating people and strategies into narrow boxes through identified digital differences. We see this in Religion, political parties, non-profits, corporations and sports. In each of these human activities we assign labels like believer, progressive, conservative, socially responsible, gender, left-handed hitter, or growth stock manager.

Organizations marshal their people and resources to deploy them in the chessboard of life using these differences. Notice, we tend to play down whether a person is particularly competent or nice, or has a good set of morals. Sometimes this leads to extreme or unwise behavior. For example, as a young father of little league children I watched some fathers urging their children to hit left handed in baseball, because it was mathematically accurate that left handed hitters had a shorter run to first base than the more numerous right handed hitters. Not much attention was paid to the young player's skill, either at bat or in the field. Getting on base however more than satisfied the father, regardless of what it did to the young person.

I saw an analogous event while I was a communication platoon commander in the USMC. I commanded forty-two mostly young Marines. These marines fit into the Table of Organization of the Corps, which in theory enables every such unit to have the same capability as every other. Each Marine is also considered equivalent to any other, any place in the world. As was often the case, my young marines and their slightly older non-commissioned officers quickly showed me the different skill sets of the troops. If we were laying down a wire network, some Marines were quick to use the paths and roads in the area. Others took more time and strung their lines in hiding, preventing them from being disrupted by their own or enemy movements. We had a few Marines that were champion tinkerers and could make old equipment better than new.

As a junior analyst at a trust bank in a bull pen of other analysts, we produced multi-page reports for the trust officers so that they could pick out a few lines for their customers. When I looked at my fellows, I noticed a few who were quite plugged into the brokerage community and were quite good at finding promising new issues. Others recommended unexciting stocks that rarely went down more than the market. Some analysts found companies that had prior problems and had solved them, or at least largely addressed the issues.

Clearly, each of us were different and could have been used differently. Recently, I have been involved with a few non-profits and corporations who wish to appeal to clients through various ESG actions. For the most part these groups don't have in-house investment experience, so they follow a “check the box” strategy in terms of age, gender, or ethnicity. In a discussion with a consultant pushing for more women on boards, she never once mentioned an applicable skill set. I pointed out that women have risen to responsible positions for some time and provided an example. In the 1990s, before I sold the data bank to Reuters Group, three out of our five offices were managed by women with responsibility for the bulk of the employees. They were not in these positions because they were women, but just happened to be the most qualified people for the job.

Selecting Mutual Funds 
Our principal job is to select and manage a portfolio of mutual funds for clients. When we got started there were relatively few funds and competitive leagues. We developed a large number, probably more were needed, and used those peer groups to help with investment selection. During short time periods, those portfolios with a good portion of their money in similar securities tended to lead or lag more diversified portfolios. For conservative longer-term holders this approach may be preferable. There are times when how a fund handles significant sales or redemptions can make them attractive or unattractive. For example, if a fund that is growing needs to add new names to the roster, picking new names that are not as good as others in the portfolio may end up diluting the portfolio. On the other hand, a fund that is in net redemption can improve its long-term outlook by selling their less attractive names, increasing ownership in their better bets.

Conclusion 
The value of particular people is more important that the labels that many put on them. People make the difference, not the labels.



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/10/two-questions-length-of-recession-near.html

https://mikelipper.blogspot.com/2019/10/things-are-seldom-what-they-seem-weekly.html

https://mikelipper.blogspot.com/2019/10/mike-lippers-monday-morning-musings.html



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Seven Steps For Giving to Charities

At this time of year snail-mail and email carry an extra heavy burden of pleas to give money to any number of mostly worthy charitable causes. Due to various disclosure documents and/or if your zip code is in one of the higher income tax payment districts, one certainty is that any charitable giving this year will generate many more requests next year. These requests will come from the same group to which you gave, but also many others who learn (or guess) that you are good for a contribution.

My Seven Steps for Giving to Charities:

1. The first step is to have a CHARITABLE GIVING PLAN. There will be more urgent pleas for your money than all of your resources. (As Mark Antony was quoted by Shakespeare in Julius Caesar, “They are all honorable men.”) This plan could encompass this year or future years. Due in part (and only, in part) to high “death taxes,” charitable giving is an important part of many people’s estate plans.

As with any plan, writing the first plan is the most difficult. The writer or if you prefer the professional term, the grantor, is often paralyzed by trying to think of every conceivable element to the plan. This paralysis usually prevents the production of a plan. As one who has drawn up many business and organization plans, I recognize that the first step is a commitment to plan. Experienced planners know that plans are meant to be revised over time. Nevertheless, if shared with one’s attorney, the first plan can become one of the foundations of an estate plan with a good chance of doing what the grantor intended. As one matures in the art of preparing and revising charitable giving plans, there may be comfort in discussing the plan with selected beneficiaries, now and in the future.

2. TRANSFERRING RESOURCES is similar to an equation. On one side are the resources. Most often cash or securities are deducted from one’s total and added to one or more charities. The motivation for the transfer is triggered by a belief there is a benefit from the transfer. This benefit is often difficult to measure or even define. In some cases the benefit is best summed up by the phrase, “A warm feeling.” I suggest one should be a little more precise in identifying the benefits.

The first benefit is that the specific charity can accomplish a favored endeavor that it could not do at all, or as well, without the contribution. The next possible benefit is that the charity’s work relieves others of an additional requirement that would have to be funded. (Perhaps improved educational opportunities that help children lead a productive life rather than increased taxes for incarceration.) There can be a personal benefit, other than a tax deduction, e.g. helping children learn a trade or a business that is needed for a well- functioning society. We need more plumbers, landscapers, and bookkeepers as well as classically-trained musicians, among many other skill sets. One of the benefits for giving money away wisely is to teach other, younger members of the family how to help others.

An important part of your charitable giving plan is to identify and understand the benefits of charitable giving.

3. GET TO KNOW THE ORGANIZATION. Many charities will treat contributions they receive as “manna from heaven,” and spend the money as they see fit. There are a large number of horror stories of various charities spending money that was intended for various forms of “good works” on themselves in the forms of compensation, facilities, and entertainment. Others have used money to influence the political process. Some contributions have been diverted to favored commercial activities. While each of these is improper and possibly illegal, the biggest waste of contributors’ resources is through inefficiencies or outright mismanagement. People who work in the non-profit world, in general, are attracted because they have faith in the good works of their particular charities. Often, but not always, they lack management skills and training. Quite often they are short in financial and investment skills. In dealing with these types of concerns, one should compare the size of one’s intended gift relative to the size of the organization.

I believe, if one is intending to become an important contributor to a charity, it would be wise to get involved as a volunteer. For a few non-profits, my principal contribution is to be a member, or chair, of their investment or finance committee. Over time what I can save for them (or earn for them) is much larger than my initial contribution. (I urge my children to follow a similar pattern for any non-profits that have an interest in helping.)

Your charitable giving plan should take into consideration not only your cash contributions, but other resources, most importantly the time being given. Unfortunately, a number of worthy causes are organizations that are not well managed.

4. UNDERSTAND WHAT YOU ARE SUPPORTING. Once one begins to show any sort of sincere interest in a non-profit, one quickly learns of its projects, programs and policies.

Projects typically spend money today or in the near future to accomplish a mission by a certain given date. Think of a new YMCA facility, a specialized hospital wing, or dormitory. Each of these requires an estimated amount of money to be spent on a specific funding schedule. Some of these projects require cash up-front; some require cash to meet progress payments due to contractors and others may require long-term financing for mortgages or equity for the charity.

Programs are often a continuous activity of involvement, with the people the charity sees as its audience. Most often, this takes the form of providing education or medical services to a community that can not afford to pay for these needed services. Instead of brick and mortar spending, program spending is mostly about paying people to work with those in need. “As the poor will always be with us,” the funding needs will almost always be with us. However, the size of the funding support can change based on the flow of contributions and perception of the immediate need.

Policies often deal with the charity’s desire to change the world. This may entail focusing public opinion on a need or attending to a problem. In working toward this goal, interacting with various levels of government is required. This activity is labeled “educating the government,” not specifically lobbying. While the mission of most charities won’t change, their policies can change slowly or dramatically depending on visibility and the political focus.

Understand what you choose to support; projects, programs, or policies. Each can have different funding needs and opportunities.

5. UNDERSTAND THE DIFFERENCES BETWEEN TRADITIONAL CHARITIES vs. MORE VENTURE DRIVEN CHARITIES. Many of the new-multi millionaires have generated their wealth quickly from being involved early in successful companies funded along the way by various venture capitalists. With their newly-achieved fortunes, they want to use the methods that made money for them when they invest in non-profits. I use the term “invest” intentionally, as this is their attitude. They look for a clear mission statement, which appears do-able. They want to see capable management in place, or at least specifically identified. They expect a timetable with specific milestones. Further, they want to see the same level of intensity in the non-profit that they “invest in” as they employed in building their fortunes. Since many made their money in new companies, often they favor new charities. But do not expect them to work their way through the various seats on a board of directors/trustees in the traditional path before they become the anointed leaders!

Understand the differences the way established charities work versus the more venture driven new charities and determine where your comfort level is.

6. MEASURE THE RESULTS. We live in a results-driven world. One of the elements of a well- thought out plan is the measurement of results. Many charities publish self-congratulatory annual reports which trumpet their perceived successes, and the even larger needs facing them. These are like other corporate annual reports or fund reports, which give one side of the story. An intelligent grantor should come up with his/her expectations and measurement yardsticks. In assessing the relative success of a potential gift, one should include personal benefits. For example, listening to great concerts, meeting interesting people, or gaining a deeper understanding of important factors about the community. If other family members have benefitted from these experiences that is also important.

In very human terms, we should periodically measure our efficiency in giving as well as living.

7. SELF-CORRECT. The final stage in any business plan or charitable-giving plan is the feed-back loop so corrections can be made and errors of judgment corrected. Facts believed will prove to be incorrect. One’s knowledge of what is important, will evolve. All of these elements should lead to the next edition of our charitable giving plan.
__________

*One of the advantages of publishing a blog is that I receive feedback. Often some of the most insightful comments are from my family. The topic of this week’s blog was suggested by my writer son, Don, who believes that some multi-millionaires need help in thinking through their gifts to charities. Thanks, Don.