We are Never Fully Prepared - Weekly Blog # 845

 

         

 

Mike Lipper’s Monday Morning Musings

 

We are Never Fully Prepared

 

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

 

 

The Lessons of Saturday, July the 13th

One self-appointed mission of the weekly blog is to make subscribers aware of potential negatives absent from the content of various media pundits and financial sources. We are not predicting bad things happening but will offer some contrast to the regular diet of “happy talk” from most other sources. In evaluating the bulk of normal inputs, I think it is useful to consider the possibility that some things will not have happy outcomes.

 

Coming from my real educational experience at the racetrack, where the most favored horses win more often than those with longer odds. The betting returns on winning favorites are smaller than those of longer shots winning. Consequently, a sophisticated bettor will often have a smaller win vs loss record but will walk away from the track with more money by selectively picking horses with higher odds. However, betting on every non-favorite usually produces losses in aggregate.

 

To prevent such a result, one must be selective in taking high odds bets and avoid improbable long shots. Thus, I was totally unprepared for Saturday’s distressing news of an assignation attempt which caused two deaths, two wounded, and most importantly the near death of Presidential candidate Donald Trump.

 

As with many tragedies there are immediate losses and potential longer-term impacts. Luckily there was just one immediate death along with two seriously wounded casualties, as well the death of the assassin. Our hearts go out to the innocents.

 

The longer-term implications are possibly numerous and far reaching. Unfortunately, in America we have periodically had both failed and successful assignations of prominent politicians. Hopefully, we can rid our culture of these tendresses.

 

I do not know if the attempt on the President’s life will have any impact on his choice for Vice President. Furthermore, we don’t know if the American voters will change their choice for President this fall, or if it will have impacts on our foreign friends and foes.

 

The impact on me personally will be to focus on the possibilities rather than the probabilities in looking at the future.

 

Things that Could Change the future

1. The results of the weekly sample survey of the American Association of Individual Investors (AAII) are viewed by some market analysts as a contrary indicator. I find it useful in gaging the short-term views of this group of smaller investors. (The survey occurred prior to the assassination attempt on Saturday.) The change in the bullish swing over the last two weeks was almost twice as pronounced as the bearish swing, 41.7% to 49.2% (+7.5%) vs 26.1% to 21.7% (-4.4%), respectively. Perhaps more significant, the bull score was more than twice as large as the bear score (49.2% vs 21.7%). This could be the result of a difference in the makeup of the sample participants. A difference of this magnitude is an extreme condition and is unlikely to be maintained.
2. Too many investors believe the market can be understood by following the S&P 500, which is a collection of eleven industry groups that move quite differently from each other. Over the last ten calendar years the monthly low points of the eleven industry groups have rarely coincided.
3. The number-nerds have great faith in US government compiled data. In an article in the NY Times, which regularly has errors. The Times produced an article with the headline “US Economic Data Integrity May Be at Risk, a Study Finds”. The article quotes a study by the American Statistical Association proclaiming the risk of future errors increasing due to government departments and agencies being squeezed by budget issues, particularly due to the lack of funding for research. I remember this problem well. In the early 1960s I was a junior analyst assigned to tracking the steel industry. I reported to the Director of Research who came to the bank as an economist from the government. One day I went to him and suggested the steel industry data was worthless in guiding investment decisions. “How could that be, it came from the government”. I suggested the eight companies in the data file were quite different. Some had to ship their products many miles to customers while others had very little shipping costs, causing large differences. Based on this factor alone those companies were better investments, Chicago over Pittsburgh. I consequently created my own subsector groups for selection purposes.
4. The CEO of JP Morgan Chase was traveling on the day it released its quarterly earnings announcement. He usually participates and I felt his input could be more important than some short-term numbers.

 

Two Chinese Inputs Could Be Significant

1. Chinese troops are holding military exercises with Belarus on the Polish border. (I wonder whether this could be the result of Finland and Sweden joining NATO, and possibly Ukraine?
2. Later this month the Chinese are holding the 3rd Plenum, where the following topics may be discussed, with some yet to be determined:

a.  Can officials restore faith in the economy?

b.  How will officials look to forge China into a tech superpower?

c.  Do foreign companies have a future in China?

d.  How will China address growing geo-economic risks?

e.  Can officials fix the government broken revenue model?

f.  How will the Party respond to China’s demographic decline?

g.  How will China try to manage the great transition?

 

 

Are you prepared for the pace and depth of changes?       

 

 

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Mike Lipper's Blog: What I See and Perceive By Observing - Weekly Blog # 844

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What I See and Perceive By Observing - Weekly Blog # 844

 

 

 

Mike Lipper’s Monday Morning Musings

 

What I See and Perceive By Observing

 

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

 

             

Often One Finds it is Difficult to Predict the Future 

I Currently find it particularly hard to predict the size and timing of the next recession. Economic news is sharply split between enthusiastic believers from discredited pundits and concerned business owners joined by the buying public. The index bulls currently appear to be winners over those focused on the near-term future, expressed through layoffs and a shift to more thrifty purchasing. 

 

During periods like this I find it useful to seek guidance from those far away from the worlds of economics and finance. Yoggi Berra was one of the most successful baseball catchers and later became a good manager of teams. He had a unique perspective derived from crouching behind home plate. One of his more well-known quotes is “You can observe a lot by just watching”. Using this mantra, the following observations may be useful. 

 

From the World of Numbers 

1. On Friday there was a significant difference between the percentage of rising and falling stocks on the two major US stock markets. Only 39% rose on the NYSE, while 63% rose on the NASDAQ. (This may indicate investors prefer shorter-term shares that are more speculative.) 
2. Extending the observations to a slightly longer period of a four-day trading week and shifting to prices, one get more balanced results. Fifty percent of the stocks on the “Big Board” rose, while 45% rose on the NASDAQ. (This shows that the general market is pretty much in balance.) 
3. Going out to a six-month outlook for the remaining half-year, the weekly AAII sample survey indicates an even more bullish than bearish bias, 41.7% vs. 2.6% respectively. It’s interesting that both indicators declined from the prior week by almost the same amount, 2.8% vs 2.2%. This is likely caused by a different group in the sample survey dominating. 
4. In looking at the list of equity funds that beat the performance of the S&P 500 in the first half. The three leaders were Fidelity Contrafund +25.6%, Vanguard Growth Index ETF +20.51%, and American Funds Growth Fund of America +16.80%. These three funds represent some of the oldest fund management companies and are the largest funds in the equity business. They also have three very distinct ways of managing money. Fidelity Contra is managed by a single manager and has wide latitude in terms of stock selection, with a turnover rate of 16 %. Vanguard Growth Index ETF has a very low turnover of 5% and Growth Fund of America has a turnover rate of 25%, which is below average.  Growth Fund of America is managed by a number of portfolio managers and the research department. (This demonstrates that there are several ways to perform well. The calculation of turnover is required by the SEC, which takes the smaller of sales over purchases divided by monthly average of total assets. The SEC was interested in identifying management churning the portfolio to generate commissions, so they only used the smaller of the two numbers. Thus, the real turnover is at least double the published turnover.)    

 

Observations in terms of People  

1. This is the year of elections, and the pundits are focusing their analysis on policies, which leads to inaccurate observations. The key is looking at the policies of the losers, not the winners, which is mostly the party now in power. In my opinion the losers failed to execute the solution to problems. One of the slogans ending Tammany Hall’s reign in New York was “Throw the Bums Out”, which is alive and well today against the “political class”. 
2. The media creates the experts they want to quote. The Wall Street Journal (WSJ) recently announced the last “bear” has left Wall Street, referring to Marko Kolanovic leaving JP Morgan. When I first read the headline, I expected to read about Jaime Dimon, the CEO of the most powerful bank in the US, if not the world. JP Morgan is a stock I own. In last week’s blog I mentioned the number of leaders of both commercial and industrial firms that have been preparing for the next recession for some time. (In predicting a recession, the exact date of the beginning should be separated from the probability and timing of the event.) 

 

 

Please share Your Thoughts 

         

 

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Preparing for a Recession - Weekly Blog # 843

 

         

 

Mike Lipper’s Monday Morning Musings

 

Preparing for a Recession

 

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

 

             

 

Learning from Wartime

When US Marines embark on a troop ship, they are instructed to wear less than comfortable life jackets. This sense of preparedness was one of the things I learned as a Combat Cargo Officer training fellow Marines for potential conflict. This preparation for the probability of danger to our economy, including client and personal investment portfolios, is what I hope to highlight in this blog.

 

Recessions are inevitable because humans prefer optimism to pessimism, expanding debt to leverage the oncoming good times. Politicians have learned that it is not a good vote-generating strategy to disappoint voters with actions. This has been the strategy for a large number of US Administrations from both parties, where they increase private and public debt without building up reserves. Consequently, history suggests we have not repealed recessions, we just don’t know when they will occur. Furthermore, we don’t know if the oncoming recession will be cyclical and largely a correction in prices, or a more painful structural recession with significant businesses collapses requiring lifestyle changes.

 

Don’t Abandon Ship by Massive Selling, But Get Your Lifejacket Ready

As a midshipman in training on the Battleship New Jersey, I was assigned to serve watch as the sole crew member in the crow’s nest, the very highest point on the ship. I was to report anything I saw as dangerous by phone. At one point I saw some round metal objects that looked like tin cans through my binoculars and excitedly reported it to the deck officer. This caused some commotion. Luckily, the old Salt of the deck officer recognized me as a landlubber and didn’t put the ship in an emergency condition. He understood that it probably was a tin can and not an unidentified destroyer known to Ship sailors as tin cans. In viewing what may be ahead for markets and economies, I will remember my midshipman experience and be careful with my language.

 

This is What I See for You to Evaluate

• The Conference Board reported that the University of Michigan survey showed a large drop in its measure of Consumer Confidence. It came close to the low of 2020.
• Perhaps as a preparatory move, 100,000 tech workers have been laid off year-to-date. (I don’t know how many are still unemployed.)
• New capital goods orders (non-defense except aircraft), were expected to gain +0.1% but actually declined -0.6%.
• A number of large public companies are cutting employment by selling products or divisions. The interesting thing is the breadth of companies taking these steps: AIG, Morningstar, Interpublic.
• Several mutual funds that performed well in the first quarter have cut back holdings weighted over 5%. Some of the stocks cut back were Berkshire Hathaway, TSMC, and AIG. (All held in personal accounts.)
• In the latest week, 55% of the stocks on the NYSE rose vs only 49% on NASDAQ. Remember, the NASDAQ is considered more speculative than the “Big Board”. Only 38% rose in the latest Saturday WSJ list of weekly prices for market indices, currencies, commodities, and ETFs.
• Two well-established mutual fund management companies with long-term orientations are expecting dramatic changes. Capital Group expects to see a meaningful rise in price volatility. (If this happens, there will likely be a rise in direct trading between major institutions.)  The other group is Marathon, who is concerned about the expected growth prospects of all aspects of “AI”. There is not enough planned construction for all elements of AI and what is required for the rest of the economy/society. There is a need for innovation and increased efficiency.
• Year-to-date through June 27th, there were four investment sectors that produced average returns exceeding the +15.51% earned by the average S&P 500 Index fund. (You may be able to get the one day that is missing, which didn’t have much impact.)

 

Investment Peer Groups Performing Better than S&P 500

Large-Cap Growth    +20.42%

Science & Tech      +17.91%

Energy MLP          +17.69%

Equity Leverage     +16.29%

 

There were 1222 funds in these four groups.

 

Question: How are you going to recognize the next recession?

 

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Understanding the Universe May Help - Weekly Blog # 842

                   

 

Mike Lipper’s Monday Morning Musings

 

Understanding the Universe May Help

 

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

 

 

 

How can High Growth Stocks Co-Habitat with Flat Value stocks? 

Well-known commentators have recognized that stocks with radically different investments attractions can co-habitat without the more enthusiastic followers driving out less ebullient investors. Although from time-to-time the dominant species kill off weaker ones. 

 

As is often the case, earth bound investors have too limited a view. My exposure to the Jet Propulsion Laboratory managed by Caltech suggests a broader view, including other planets and similar elements. So far, we have not found any planetary bodies possessing a similar atmosphere to earth, so war between them seems unlikely. 

 

This suggests to me that growth and value can co-exist. The high price to earnings for extreme growth is neither a threat nor an inducement to own single digit p/e stocks. Extreme growth “planets” will move to their own rhythm and will not usually be impacted by value-oriented bodies, despite attempts at colonization.  

 

To show the difference we can look at the current year-to-date investment performance of two funds managed by Vanguard.  Their S&P 500 index fund has gained +15.51% this year, while their Total Bond II Institutional fund has fallen -0.20% for the same period. The S&P 500 has fellow travelers like the NASDAQ Composite, with a +18.65% return. The performance gap between the S&P 500 and the NASDAQ may be closing. This past week saw stocks on “The “Big Board” decline 44% vs 53% for the NASDAQ. 

 

Trading liquidity could be a contributor, with small and mid-cap stocks dropping for the past 13 weeks. Another factor could be the lack of dividends.  The 30 stocks in the Dow Jones Industrial Average (DJIA) have 3 non-dividend payers, or 10%. There are twice as many non-dividend payers in the Dow Jones Transportation Index, with one-third less positions, representing 30%. 

 

Market Structures are Changing   

Large Multi-Product/Service Financial firms have reacted to the slowdown in their revenue growth by forcing their various product/services silos to work to expand the firms’ sales base. Their model is similar to department stores which are closing or becoming depots for orders placed online. Another issue is good department store salespeople believing the customers are theirs, not the stores.

 

One attraction for sales teams leaving “wire houses” is Raymond James’* belief that customers belong to the brokers, not to their firms. They offer three alternative ways to join Raymond James. I believe there is a natural peak of good customers for every trade, after which new efforts will lead to lower margins.

 (*) Designates a position either owned by customers and/or personal accounts.  

 

An example of a smart move is Morningstar’s sale of their TAMP business, which recognizes that the number of fund distribution points is shrinking. 

 

T. Rowe Price stated in their mid-year outlook that the risk of recession is now lower. That is possible, but history suggests the higher securities prices go for a narrow segment of the general market, the more risks rise. 

 

Other Brief Comments and Observations 

The US and China agree that they prefer seniors stay in the countryside rather than come into the cities. They also both want more babies produced. The rich country replacement rate is currently 1.5% vs. a neutral rate of 2.1%.  

 

In a period where national productivity is low, the idea of creating holidays like Juneteenth and Labor Day looks politically motivated. Each day of lower productivity increases the risk that lower income jobs will be replaced by machines that can work 24/7, 365 days a year. 

 

Institutional investment sentiment was lower in June than May and April. Currently, 53% of the surveyed institutions believe a recession is not expected for the next 18 months. (I suspect there is a bias at work in their projections. Many, if not most of the respondents are primarily employees rather than owners of their businesses.) 

 

The big four accounting firms are laying people off. 

 

There is a somewhat useful Walmart Recession index of future risk, which increases when store sales are higher than the movement of their stock price.      

 

The standing military in Russia, Ukraine, and China are finding that they are not properly equipped to accomplish their mission. They point to corruption as the cause. (I suggest corruption is something of global problem. Perhaps Dr Spock or his replacement can solve the issue during an intergalactic conflict.) 

 

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Stock Markets Becoming More Difficult - Weekly Blog # 841

 

         

Mike Lipper’s Monday Morning Musings

 

Stock Markets Becoming More Difficult

 

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

 

 

 

Picking a portfolio of currently attractive stocks is becoming more difficult around the world, both for the portfolio managers and business managers. This is emphasized by the media’s attention on popular indices, where a small number of stocks are driving performance. The media, marketers, and unsophisticated investors chatter about “The market”. However, today there are multiple sub-markets within the entire universe of available stocks.

 

The job of a good portfolio manager is to carefully select individual securities or funds. No single account should be identical to another. Even if the two started out identical, over time cash flows will create differences.

 

There is a fundamental problem with what most scribes write about securities, as most significant differences result from key critical elements. I will discuss the way the late and great Charley Munger and Warren Buffett might discuss a particular investment. (Both our clients and me personally own shares in Berkshire Hathaway.)

 

Large Caps on the NYSE

Product producers and marketeers are responsible for the bulk of large-cap volume. They are fabricators who repackage raw materials into useable products. The better ones have skills in both purchasing and selling. Currently, the overall stock market view is that many of these product producing companies are in pre-recession mode. New orders are falling behind current deliveries. The market reflects this, with 77% of stock transactions on the NYSE executed on declining prices this past week. By contrast, only 58% of the stocks traded on the NASDAQ were executed on falling prices. In contrast to NYSE companies the NASDAQ has more service-oriented companies, many of which are at an earlier part of their cycle. Furthermore, many of these companies are led by their founders or other entrepreneurs. Typically, Berkshire Hathaway buys companies with good management and keeps them in place. Larger-cap companies rotate some of their managers in training, hoping they will get useful experience at totally managing an enterprise. This experience helps prepare them for similar opportunities at the parent company. Even division heads often lack responsibility for the full business.

 

Playing the Players on the Fast Track

Each week the American Association of Individual Investors (AAII) surveys a sample of their members to get their outlook for the stock market over the next six months. In earlier years I suspect the respondents were relatively conservative senior citizens with meaningful portfolios. In some case they were active investors.

 

Having attended a number of meetings with unidentified “wealth managers” trolling for clients. Professionals pay attention to the weekly numbers for two reasons. The first is their belief in the public always being late. (In truth the long-term record of the public is pretty good, although they are weak at peaks and bottoms.) A second reason is that some professionals want to hear from the “public” to catch the beginning of a trend.

 

This week the bullish members had a meaningful jump to 44.65%, after two weeks at 39%. Bearish readings for the last three weeks were 25.7%, 33.0%, and 26.7%. Most of the time Munger and Buffett buy into a declining price pattern over time.

 

Capital Utilization

Berkshire and a small number of others have generated more capital than they can wisely use in their operating businesses. Today it is more difficult to wisely put capital to work due to the high prices of good properties, and short-term interest rates in the 5.25% to 5.50% range.

What attracted their investment in the past was a good manager looking to add a new aspect to their business. Some of their recent investments in energy were this type of investment. These investments did not result in increased capacity, they were preferably a uniquely new project with a good margin when developed.

 

Business Economics vs. GAAP Accounting

Evaluating what a knowledgeable buyer would pay for a position in the marketplace. Long-term potential earnings power at the bottom of an economic cycle vs correct judgement of a fashionable product. As an example, for years car buyers were attracted to the newest looking cars and during that phase car producers were in the fashion business, particularly if they had creative advertising. This was of no interest to the two leaders of Berkshire, who were more interested in longer term control of critical supply chains. GAAP accounting was of no great value in Real Estate and Pharma. In both cases, winning investments were not what is present, but what they will be.

 

The Investment Game is Changing

There are now a large number of new CEOs and I expect an even larger number over the next five years. Additionally, the structure of the investment sector is changing. For example, Fidelity is attempting to get a fee from ETFs sold through Fidelity’s brokerage desks. If they don’t get it from the ETFs they will likely attempt to introduce a service charge paid by their accounts.

 

It is conceivable that growth in the number of companies moving their headquarters and tax status to Texas will result in substantial growth in listings at the newly formed Texas Stock Exchange. This is already causing national accounting and law firms to beef up or open Texas offices.

 

In the past, the custodian function was considered a good business. But as this activity has become concentrated in a few multi-national organizations, it has become difficult to sell smaller custodian firms. When Ford Motor went public, the tombstone included a very large number of brokerage firms. Most of those names have disappeared, with some merging out while others just went out of business. We have seen the same thing happening to regional stock exchanges, where very few of the remaining exchanges have a trading floor. Instead, there are a computer networks dominated by a few firms. When the next structural recession occurs, it is my guess fewer organizations will be left in business. In the second quarter of 2024, a number of brokerage firms, stock exchanges, and investment advisors are losing revenue momentum.

 

P L E A S E   S H A R E   Y O U R   T H O U G H T S

 

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Transactional Signals - Weekly Blog # 840

 

         

Mike Lipper’s Monday Morning Musings

 

Transactional Signals

 

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

 

  

When my term as President of the New York Society of Security Analysts (NYSSA) expired, I turned down staying on the Board feeling that comments by the former President may not be welcomed. I offered to provide inputs privately when asked. I made a similar offer when I moved on from my position as a USMC officer. With that as a background, I found myself in a somewhat analogous position as a member of the Finance Committee of the Board of the Stevens Institute, where I review an extensive report containing the student managed investment fund. 

 

While the other trustees were highly complementary as to the work of the students, I thought they should get a real education from this exercise. I felt the analysis was lacking any discussion of management and its expected retirement. This was logical, as their time period was the length of the current academic term. To me this was trading, as it was not long enough for an investment period. To me, investment periods begin with five years (roughly the average length of many CEOs). I suggested there was a reasonable chance of a new CEO over the 5-year period.  

 

With this as background, I noted with interest the Barron’s article titled “A Trio of Transitions Will Rock Wall Street”. The three are Larry Fink, Jaime Dimon, and Stephen Schwarzman. The article would have been more useful if it had discussed the likely cause of the retirements: recession, unfavorable regulation, stronger competition, new products/services, shrinking internal political support. With aspects of technology and finance coming closer together, changes in the management of Apple, Microsoft, and the Stock/Commodity exchanges, among others, should be expected within the next five years.

 

I will briefly discuss some of the characteristic changes that may impact stock prices within five years.

 

Possible Recession Risk

Any student of economic and financial history knows that there will be periodic recessions caused by the mistakes of leaders and others. If one looks carefully there is usually a small signal that most ignore. One may be what is happening with the ISM data on the manufacturing side of the economy.

 

The ISM Manufacturing PMI survey for May had a reading of 48.7, a contraction from the April reading of 49.2, a fall of 0.5. The survey for new orders fell to 45.4 from 49.1 in April, a sharp drop of 3.7.

 

Manufacturing employment on the other hand went up to 51.1 from 48.5 in April!!! A possible explanation could be manufacturers hiring younger and cheaper people to replace older and more expensive people. Or perhaps there is a miscommunication between the different functions.

 

Two Positive Signals

In May the S&P 600 small-cap index grew 4.87%, slightly better than the S&P 500, both without dividends. If the market continues to rise on speculation, the 600 will be the leader. In May, seven of eleven sectors in the 600 did better than the 500.

 

Small banks, contrary to their larger brethren, sharply increased their purchases of mortgages on commercial real estate. Local banks quite possibly have a better feel for local real estate value than larger banks, which are hundreds to thousands of miles away.

 

Some Investment Managers Can Repeat Being First among Peers.

The London Stock Exchange Group has continued the Lipper Analytical practice of tracking the best performing mutual funds for periods as short as one month through 10 years.

 

This weekend I reviewed what is usually the toughest competition for the eight periods. Eight is listed as the denominator to the extent the category existed for all eight periods, otherwise a smaller number is listed.  (Year to date, 1 & 3 months, 1, 2, 3, 5, and 10 years). I then looked for fund houses that had two or more entries. The data below shows the results of the major peer groups.

                   # of Repeaters

Peer Groups       Winners   Losers

Large-Cap Growth    6/8       6/8   

Large-Cap Core      4/8       4/8        

Large-Cap Value     6/8       5/8

Multi-Cap Growth    3/8       7/8

Multi-Cap Core      5/8       2/8

Multi-Cap Value     5/7       0/7

Mid-Cap Growth      4/8       3/8

Mid-Cap Core        5/8       4/8

Mid-Cap Value       7/8       2/8

Small-Cap Growth    5/7       4/7

Small-Cap Core      6/8       6/8

Small-Cap Value     8/8       3/8

 

Remember, I was looking for repeaters in terms of fund management companies, as there are fund name changes and portfolio manager changes over 10 years. Additionally, portfolio managers can manage two or more funds. The winners tend to stay with their portfolios, although markets rotate. The losers change portfolios in an attempt to get off the bottom, if they still have a job.

 

A Sign of the Times

Due to a money shortage, the Department of Labor announced it is planning to reduce the number of inputs to their surveys starting in 2025.

 

 

Question: What should we be watching?        

 

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Investment Markets are Fragmenting - Weekly Blog # 839

 

         

Mike Lipper’s Monday Morning Musings

 

Investment Markets are Fragmenting

Flows Going to Potentially Higher Risk

 

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

   

       

   

Why the Fragmentation?

The answer is simple, salespeople make money by getting investors to make investment choices. At the institutional level commissions have totally disappeared, and the same largely applies at the retail level too. However, “vigorish” is alive and well, just with different names for spreads, underwriting fees, and management fees. Passive clients may decide at some future point that management fees are not worth it.

 

A valuable client is one that is actively investing and directly or indirectly aiding in getting new active clients.  The value of a client occurs either through the flow of new money or the reallocation of the portfolio. The marketing agent is consequently a bit of a worrier when communicating with clients. Furthermore, there is a desire to introduce new investment ideas, particularly new types of securities or new investment markets. The marketer will often present him or herself, or their firm, as more knowledgeable than the client. Thus, the marketer can dominate the client more than they expect.

 

Performing Better with More Risk

What follows is a brief discussion of current possible ploys that might be suggested. In truth these ideas might be sound if executed when not so popular. If peers already hold positions in the new play, their length of time to the eventual peak and subsequent major decline is shorter.

 

There are a very limited number of investors who have trading skills, and that does not include me. Most successful investors hold a relatively small number of holdings for many years. These are the types of investors who own Berkshire Hathaway with the goal of transferring assets to heirs after they are gone. (I am one.)

 

Until perhaps this week, James Mackintosh a Wall Street Journal columnist, noted that “Four giant tech stocks added more market value than all other stocks in the S&P 500 for the last month.” I suspect many investors were enticed to buy those four stocks. Unfortunately for them, the only class of stocks to rise for the week ended Thursday were small caps. regardless of growth, core, or value orientation.

 

Many individual and institutional investors have portfolios consisting of stocks listed on the NYSE, usually with dividends. These investors might be enticed to invest in NASDAQ listed stocks due to the greater number of tech stocks. There is a belief that most short-term NASDAQ traders are better than those playing on the big board. In the latest week only 23% of NYSE volume fell, compared to 42% on NASDAQ.

 

The fastest growing asset class today is Private Investments, either individually or through funds. As is often the case, the biggest risk is not the issuer, but other holders. The sponsors of private debt and equity do not have an obligation to buy back securities, except at the terminal date. The secondary market is very limited, and prices favor professional dealers.

 

Jaime Dimon, CEO and Chair of JP Morgan Chase is worried about inevitable investment mistakes in the privates. Although he does not see a structural problem, I think there potentially is one for two reasons.

1. These securities are being sold to individual investors. When the public loses money, they often complain to the media and members of congress who are always pro regulation.
2. There are very few pension funds still operating. Many have promised fixed returns to government employees, which includes teachers. For years these plans have used interest rates much lower than current rates, many of which have been bought from insurance companies. I believe some insurance companies will go bankrupt if interest rates stay at current levels or go higher, with the retirement burden falling on taxpayers. Politicians are probably better at getting the feds to change regulations. A guaranteed payment funded by a variable (market) sensitive vehicle is dangerous.

 

What are Your Thoughts?

 

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