Trends: Deflation, Stagflation, or Asian? - Weekly Blog # 760

Mike Lipper’s Monday Morning Musings

Trends: Deflation, Stagflation, or Asian?

 

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

            

 

Disturbing Data 

Some baseball umpires call balls and strikes as what they should be, how they see them, or what they are. Market and economic observers are like umpires. A majority tend to be in the first group, believing the next major trend will have inflation under control and stock prices rising. As a long-term investor and manager, I am caught between the latter two choices, seeing the future as presented, or as it is or will be. 

 

I am interested in what readers believe the future is likely to be. 

 

Current Data 

Government economists see an approaching pivot in the economy resulting from the only inflation tool at their disposal, interest rates to constrain demand. (Not a more useful approach of augmentation of supply i.e., more domestic energy and less restrictive regulations.) Market bulls see a stock market led by the DJIA industrials, +17.48% from its bottom, as the beginnings of a new “bull market”. I see a rally in a bear market, with the natural leader being the NASDAQ, with a gain of only +7 %. 

 

Current Data Forecasting Problems 

For most of this year the interest rate spread between 2 and 10-year US treasury bonds has been inverted, a historic predictor of recession. The current yield on the 2-year is 4.51%, which is higher than 10 and 30-year rates. 

 

The weekend edition of the WSJ showing prices of securities, commodities, and currencies was extremely volatile, with 65% declining. Furthermore, the weekly posting for the ECRI industrial price index showed a year over year decline of -12.9%. While not conclusive, these readings suggest that when our inflation ends it will begin a deflationary cycle very few are expecting. 

 

2023-2024 Views 

As to the future, I am not sure what I see.  I have respect for the very bright people at Goldman Sachs. (A holding in our private financial services fund and other accounts.) In their latest economic projection, they see US GDP only producing a +1.0% gain in 2023, increasing to +1.6% in 2024. 

 

Whenever I see a projection below 3%, I remember all the times small gains didn’t happen for operational, weather, and other unpredictable reasons. With larger gains there is room to absorb surprises. 

 

The second and more dangerous Goldman projection was the beginning of a dreaded period of stagflation. In the US, we have had two periods of stagflation lasting more than ten years. Stagflation is a period of rising inflation with generally flat profits, which could be caused by higher effective federal, state, and local taxes. While it is probably too early to adopt a stagflation portfolio strategy, it is not in my opinion too early to begin researching the composition of such a portfolio to carry one through such a period. 

 

Goldman believes there is some good news for investors in 2023 and 2024. Economically, they see China’s growth rising to +4.5% and +5.3%, respectively. They also see India’s economy growing +5.9% and +6.5%, respectively. While we have some exposure to India in our personal portfolios, it represents less than our exposure to China. This is because of the different level of efficiency and integrity, but we could be wrong. At any rate, US funds invested in the China Region were the best performers this past week. 

 

The Stock of T. Rowe Price is still Teaching 

In the last edition of the blog, I wrote about T Rowe’s stock price going up from $103.71 to $133,34 in the week. At the same time daily trading volume expanded from 1.7 to 5.5 million shares. I commented that this demonstrated the lack of liquidity for a NYSE stock. On Monday this week the stock opened at $131.02 and ended at $125.50, essentially the same level it began the week before, $125.84. The big difference was trading volume. The prior Friday it was 5.5 million shares, followed by 3.2 million shares on Monday, and 1.5 million shares on Friday. 

 

The lesson is that if you are anxious enough to raise your price you can find liquidity. Trading liquidity disappears with the absence of demand. (Some of the liquidity is supplied by the short side.) It was clearly a week where patience and discipline paid off. 

 

Beware of What you Believe 

My sharp-eyed brother reminded me that the perception of half the start-ups not making it to five years was based on a Small Business Administration study relying on data from telephone companies. Many of the start-ups were dissolved, acquired, or moved without maintaining their phone number. We are not doubting the risks involved with both small companies and start-ups. But we should always investigate the source of the data to make meaningful decisions. 

 

What is your current view of the future?   

 

 

 

Did you miss my blog last week? Click here to read.

Mike Lipper's Blog: An Informative Week with Many Questions - Weekly Blog # 759

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

Mike Lipper's Blog: Rarely Found Different Thoughts - Blog # 757

 

 

 

 

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

  

An Informative Week with Many Questions - Weekly Blog # 759

Mike Lipper’s Monday Morning Musings

An Informative Week with Many Questions

 

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

                   

 

 

CPI Thursday Morning Pivot or Rotation? 

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

 

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

 

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

 

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

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

 

T. Rowe Price Lessons for Investors 

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

 

T. Rowe Numbers for the Week ended November 11th

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

 

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

 

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

 

Other Thoughts of the Week 

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

 

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

 

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

 

What are Your Thoughts? 

 

 

 

Did you miss my blog last week? Click here to read.

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

Mike Lipper's Blog: Rarely Found Different Thoughts - Blog # 757

Mike Lipper's Blog: Current and Future Views are Confusing - Weekly blog # 756

 

 

 

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.

       

 

 

Are You Getting Value from Numbers? - Weekly Blog # 758

 

Mike Lipper’s Monday Morning Musings

Are You Getting Value from Numbers?

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

            

 

  

Investors tend to be number hogs. They trust that the numbers they see represent reality, which sometimes they do. Most of the time investment solutions start and end with some form of equation.

 

We would be better off if we started and ended our analyses with qualitative descriptions. These could capture our depth of thinking on the topic and clue us into our weighting philosophy.

 

 If we can’t immediately use a numerical relationship, we tend to discard it. It would be more useful if we filed it under future problems. The rest of this blog is built on three numerical relations that have been ignored. I believe they have kernels of useful thoughts.

 

Value of Market Index Leadership

Among the market indices, I pay particular attention to three. The Dow Jones Industrial Average (DJIA), the S&P 500, and the NASDAQ composite. I believe the particular index leading or lagging the other two is descriptive of the type of leadership driving the general market.

 

Regular subscribers to these blogs probably noticed I was getting increasingly bearish starting November 2021. This was because the NASDAQ Composite hit a new high in November, which was not followed by the other two indices. Furthermore, the NASDAQ was driven by tech companies, which seemed like a stretch. Projected gains as a percentage were greater than the prior percentage gains. The bulls on these stocks were probably overextended.

 

Currently, the index flashing caution is the S&P 500, which on down days flirts with its historic lows or scores a minor low. It remains very close to its low for the year. At the very same time the DJIA has risen most and is least analyzed by professionals. I call this weak leadership.

 

As of Friday’s close, the S&P 500 was up 5.41% and the NASDAQ up 0.56% from their respective 2022 bottoms.

 

How Much Do You Know about Your Stocks?

Many investors, including some professionals, treat some of their stocks and CEOs as icons to be followed regardless of results. Two of these are Warren Buffett and Charlie Munger. I would suggest that stock or political investors who do not regularly read Berkshire’s quarterly SEC form 10-Q are not being prudent.

 

In the latest 47-page edition they go through both the tax and legal reason they conduct business the way they do. The 10-Q was published this Saturday and most of the press focused on the reported loss resulting from price declines in their equity portfolio, as well as storm and accident losses in their insurance complex.

 

This information resulted from required SEC disclosures. What many articles either ignored or only later covered was the increase in operating earnings of the wholly owned, or at least 20% owned companies. Buffett and Munger believe that operating income is the real measure of their company’s progress. (They fought the SEC about the requirement to include the price movement of their portfolio in earnings per share, rather than just showing it as an adjustment to book value.)

 

They run the company as a giant trust account for the heirs of the present shareholders. As both an owner and portfolio manager for family and other accounts, I agree with them. Matter of fact, that is the way I look at most of my long-term holdings. To me, the after-tax free cash flow earnings of a company is the most consistent measure of an operating company.

 

When I use mutual funds and other portfolio holding companies, I recognize that outside people value the company by its actions in the market. To me, the impact of market action is a cyclical phenomenon, having more to do what other owners are doing with their assets. It is not the reason I hire managers to grow the assets for the beneficiaries of my efforts.

 

I therefore need to track both the after-tax operating cash flow and market input to judge the skills of my operating managers. I also need to evaluate how well I react to what the market does to my owned assets.

 

Believing a reasonably well selected portfolio of assets will rise through inflationary and other periods, I can be patient.

 

Selective Review of Prices Is Appropriate

Nothing about prices and the actions of people is guaranteed to be repeated exactly as it was in the past. Nevertheless, from time to time it makes sense to review what has happened in order to think about future portfolio actions.

 

The following are views of market analysts of a major financial-services company worth considering:

1.   US Treasuries may see a major bottom in March-May ‘23
2.   Some expected inputs that may also bottom:

A.   Lower Consumption

B.    Higher Savings

C.    Selling of stocks by retail

D.   Major Credit Events

3.   China to re-open

4.   Similarities with the 1973-first quarter - 1974 pivot

5.   Small Caps, which are not a target of government, will lead the market. A trend that could last five years

The next two years will be difficult, because enforcing discipline will be tough. Nevertheless, it is time to rethink investment strategy.

 

What are your thoughts and plans?

 

Did you miss my blog last week? Click here to read.

Mike Lipper's Blog: Rarely Found Different Thoughts - Blog # 757

Mike Lipper's Blog: Current and Future Views are Confusing - Weekly blog # 756

Mike Lipper's Blog: Fundamental Changes Occurring - Weekly Blog # 755

 

 

 

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 - 2022

 

A. Michael Lipper, CFA

All rights reserved.

 

Contact author for limited redistribution permission.