Lazy Summer, a Good Time to Change Thinking - Weekly Blog # 639

Mike Lipper’s Monday Morning Musings

Lazy Summer, a Good Time to Change Thinking

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

In the northern hemisphere summers often usher in the most enjoyable part of the year, with time to recuperate from winter’s focus on survival. In our trading/investing world, the summer is often a period of relatively low transaction volume combined with a lot of vacations. We contrarians scan for changes, while the majority shift their attention elsewhere. The old quote given to planners captures our anxiety “if everything seems to be going well, you have obviously overlooked something”. While I cannot predict the future, I know that recognizing change early is highly productive in making money and or avoiding significant loses.

Stock Market Leadership is Changing
Following on last week’s blog which sensed that some change is occurring, I looked at the weekly performance of 103 mutual fund investment objective peer groups. Using fund performance data from my old firm, year to date through Thursday there were only 27 peer groups rising more than the +1.04% gain for the average S&P 500 index fund. However, for the week there were 84 peer groups that beat the Index Fund’s gain of 0.64%. Clearly, we have gone from a minority of peer group averages lagging, to a majority doing better. What is happening?

Perhaps the individual fund peer group performances give us a clue. The average Large-Cap Growth fund gained +14.90% year to date but only rose +0.61% for the week, trailing ever so slightly the +0.64% gain for the S&P 500 Index funds. Their significant overweight in technology was not likely the cause, as the Science & Technology funds average gained +1.53% and Global Science & Tech funds gained an even higher +1.87%. I suggest that while Large-Cap Growth Funds had an oversized position in tech, they did it in relatively few stocks compared to the more diversified sector funds. Thus, the problem may well have been in an over commitment to a dozen or so big tech holdings. Another possibility could be how the average Large-Cap Growth Fund handles its substantial flow of new money, which came in after good relative performance. To keep the number of holdings in the portfolio manageable, managers bought more of what they owned, as they by definition were the most liquid stocks in the market. Furthermore, an army of analysts were predicting a continuation of good earnings in these trying times. This coming week we will see whether the rosy estimates were close to being correct.

There is another way to look at the evolving change in market leadership.

• Some “value” funds and a significant number of sector funds are doing better than the S&P 500 Index, which is market-capitalization weighted.
• Many currencies are doing better than the US dollar, leading to weekly gains of +2.19% for Global Sector funds and +1.68% gains for World Equity funds. There are a number of explanations for these market trends:
• Numerous countries are apparently dealing with COVID-19 better than we are, with the economies of both Europe and China doing better. 
• The US stock market has become extremely bifurcated, with perhaps 10% of the stocks contributing to most of the indices’ gains. If most of the market does not catch up, there is a question as to how much longer this rising market can last.
• The current political campaign is depressing. The views of various candidates are reducing enthusiasm for their positions, both among their followers and the relatively limited number of independent thinkers. 
• There is little belief that the US is likely to have good times immediately ahead, partially due to our debt burden at all levels of society. 
• Without an expanding real economy, we are likely to see an increasing number of business and personal financial failures. 

What to Do?

1. The first thing many investors need to do is switch their primary interest from security selection to portfolio allocation, including available cash for investment. 
2. Create or update a schedule of likely cash withdrawals.
3. Organize the portfolio and identify holdings according to your current thinking, e.g. relative current risk, assets that are hedges or are held to address specific concerns, comfort levels, any other way that might drive decision making.
4. Array your assets in each of the above buckets and see if the allocation is appropriate.
5. In this lazy summer season and probably before mid-August, focus on your largest allocation and reduce the biggest allocation bucket by 10%. This will increase your flexibility to reinvest opportunistically.
6. Keep reducing excessive allocations by 10% quarterly until comfortable.
7. Begin increasing your discomfort by making new investments with specific goals in mind. 
8. Identify review points, either on a calendar basis or when a structural event occurs, either within your account or the security’s own development. 

If you need help or disagree with this type of thinking contact me.


 
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/07/that-was-week-that-was-change-weekly.html

https://mikelipper.blogspot.com/2020/07/currently-selling-more-important-than.html

https://mikelipper.blogspot.com/2020/07/july-4th-lesson-need-to-hire-wise-not.html



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 - 2018

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

“That Was the Week That Was” = Change - Weekly Blog # 638

Mike Lipper’s Monday Morning Musings

“That Was the Week That Was” = Change

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

Introduction
This week’s title is not for code breakers but refers to series television title that was the name of a comedy review from the early days of network television making fun of the strange things that happened during the week. In prior blogs I quoted Lenin regarding the slowness of most historical trends to develop, but that accelerate in just a few weeks. “Change” is a sudden disruption of past trends, which great investors anticipate. Good investors recognize changes early when underway, while average investors are trend followers and poor investors extrapolate trends far too long.

Week ended Thursday-July 16th 
The prior investment performance trends that had gone on for over a year were disrupted. (Based on experience, the most accurate performance data terminates on Thursdays, avoiding the rush to start weekends that begin on Friday afternoons for some. This is particularly true during the summer.) Past performance results were led globally by up to ten large tech-oriented companies, providing vital internet services to people who were “sheltering in place”. These companies were supported by up to forty important suppliers. The strong stock price performance of up to fifty companies gave the impression that our economies were in a “V” shaped recovery, if not the early stage of a bull market. If one looked at thousands of other companies, the lift off the pandemic bottom was more modest. The two tables below show a distinct change in performance leadership for US registered mutual funds in rising order of change for the week ended July 16th:

S&P 500 Index Funds    +2.02%

Large-Cap Value Funds  +4.89%  
Multi-Cap Value Funds  +5.42%  
Mid-Cap Value Funds    +6.58%  
Small-Cap Value Funds  +7.35%  

Large-Cap Growth Funds -0.70%
Multi-Cap Growth Funds -0.47%
Mid-Cap Growth Funds   +0.40%
Small-Cap Growth Funds +1.45%

This is the first week in memory that value funds not only beat growth funds, but meaningfully so. Also, I find it of interest that the size of the stock market capitalizations in fund portfolios impacted performance so markedly. The declining order of performance in the week may well be the cost of liquidity required by heavy traders.

The performance disruption of past trends also occurred in the performance of SEC registered, internationally invested mutual funds.

China Region Funds           -5.30%
Emerging Market Stock Funds  -2.20%
Latin American Funds         +0.30%
Japanese Funds               +1.44%
European Funds               +2.94%

Of the 25 best performing mutual funds this week, 16 were small caps and 13 were value focused funds. (Obviously, some good performers made both lists.) China Region Funds have been the leading geography to invest in for most of this year, while Europe has been going through a very long turnaround. As is typical of the future discounting attribute of stock prices, they are further along than economic reports. One should bear in mind that all numbers are based on translation into US dollars from local currencies. Thus, the presumed relative safety of US dollars could be impacting the above numbers. The S&P/Dow Jones Indices track 32 markets. In their latest report, 25 rose and seven declined, with one of the seven falling being US large growth.

Applying Change to Selections
While security holdings change very little in many fund portfolios, some constantly evolve. Those that make a limited number of changes believe that investors wish to own the kinds of securities they see in periodic reports. Others believe that their investors want the results of the following principles, which can lead to changes in both the weighting and names in their portfolio. Below is a list of tactical moves that one fund manager is applying as they react to the changes in perception of future developments.

Selling inputs (To generate cash for investment opportunities)

1. Selling into rising strength
2. Selling to normalize size of positions
3. Selling into poor M&A activity

Buying Inputs (Building future sources to meet needs)

1. Buying into declining prices
2. Starting new positions in the best companies in a troubled sector
3. Increasing market share of the stock that’s not already discounted
4. Buying into strong balance sheets, spending discipline, and free cash flow generations, even when current earnings disappoint
5. Expect rising oil and energy prices over next year or two, within a bear phase
6. Capacity cutbacks create opportunities that create trading opportunities

Any thoughts?


 
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/07/currently-selling-more-important-than.html

https://mikelipper.blogspot.com/2020/07/july-4th-lesson-need-to-hire-wise-not.html

https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html



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 - 2018

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

Currently, Selling More Important Than Buying - Weekly Blog # 637

Mike Lipper’s Monday Morning Musings

Currently, Selling More Important Than Buying

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

July is often a low volume, relatively quiet, stock market period.  August, with its different conventions, COVID-19 progress and short-term economic signals, will likely be more lively. This is therefore the ideal time to look at portfolios with two to one hundred plus securities. Include in your analysis both all the cash that could be invested and probable cash demands well into 2021. This review is unlike the usual process of buying some new and exciting investment, where you quickly find the money for your new “almost certain winner”. However, most of the time new purchases will not drive next year’s performance, it will be more impacted by the remaining portfolio.

Remember March
Many investors feared that the one-month dramatic fall in stock indices was the opening salvo of a long, protracted “bear market”. As usual with mass fears, it did not happen for political reasons. Yet, although there was still some of the normal cleansing effect of an economic recession, it was perhaps not enough.

Record 2nd Quarter Continuing
With governments and their junior partners, the central banks, induced a strong rally occurred led by speculative forces, including the not yet dead zombies that should have been liquidated. The NASDAQ Composite gained +30.6% in the quarter and continued through Friday with another record high, gaining +4.01% just last week. Globally, the big winners were two handfuls of large-cap technology-oriented stocks. Even with the increasing levels of tension with China, their stocks are the biggest winners as an investment region thus far in 2020. Last week, 16 out of the 25 best performing SEC registered mutual funds for the week were primarily invested in the China Region. (Even within China, the controlled press warned local investors to be careful with record prices and a wave of new IPOs.) In the US markets, 75% of the weekly prices for ETFs, stock market indices, currencies and commodities were higher. Translating all this bullishness into mutual fund performance for the funds we are particularly interested in, some had gains better than 50% from the March lows. One might suggest that some investors are experiencing a sugar or other stimulant high.

Outlooks
There are as usual a myriad of outlooks depending on both direction and varying time periods. While investors should sub-divide their portfolios into different time periods based on the expected needs for their capital, they do not. Unfortunately, most investors, particularly those competing for new money, are fixated on 2020 results. This is unfortunate because I hope the future does not contain many years similar to 2020.

Six Month Positives
The AAII, usually a reliable contrarian indicator, has now flashed four straight weeks where their sample survey of member market expectations for the next six months was over 40% bearish. This number is unusually strong both in magnitude and duration. While they could be correct this time, it would be surprising.

Longer-term Concerns
Citigroup has a model identifying periods of panic and euphoria designed to predict the stock market one year into the future. It is based on tracking extreme current market behavior that will lead to a reversal the following year. The current reading from this model points to lower stock prices a year from now resulting from the short-term euphoria we have been experiencing.

Barron’s publishes a weekly chart on the movement gold mining stock prices vs. bullion prices. Recently, the price of the metal has been rising gently while the index of mining stock prices has been rising sharply, suggesting buyers of mining shares expect materially higher prices in the future. Most mining companies are highly leveraged, with operating expenses, debt, and stiff taxes. Traditionally, when the price of gold goes up, most other stocks go down. Mario Gabelli, a well-known and respected investor, expects 2021 gross margins to decline.

Recently, there has been an increase in the number of people believing that there is a reasonable chance of a ”blue wave” coming in the election, with the Democratic-Socialists winning the Presidency and both houses of Congress. If that were to happen, many believe taxpayers and consumers would forfeit twice, both with taxes and inflation rising measurably. If the “blue wave” does not materialize, it is likely that only accelerating inflation will cause the squeeze on gross margins that Mario expects. Both party’s policies will lead to an increased cost of living. Under any of the feared circumstances, the long-awaited relative price performance of some value stocks will likely improve.

The Poor History of Escaping from Cash
In the last fifty years or so, we have seen attempts to escape expected sharp gains in inflation, leading to the liquidation of some assets like cash in order to invest in “real assets”. Remember when the Japanese bought high-priced golf courses around the world to escape their inflation. They paid premium prices for classic real estate, e.g. Rockefeller Center.

For perhaps twenty years, Chinese citizens and relatives of political people have been exporting their wealth to Western countries whenever they could.

In the West, the wealthy have bid up popular pieces of art to ever higher prices. Many financial writers scoffed at the high prices paid for these foolish purchases, not recognizing that the buyers were actually selling an over-priced currency held in surplus. Perhaps this is what is in the mind of the current “goldbugs”?

My guess in all these cases, even measuring at their lower exit prices, the exporters will come out ahead of those that stayed completely in their own currency.

What to do?

1. Make a list of your current assets and resources net of obligations. Put the list in descending order as a percentage of wealth.
2. Pay particular attention to the top half of the wealth pile and ask if you would choose to have that much of your wealth so exposed today.
3. Staying with the top 50% of the list, what could negatively impact its value. Separate the list into general calamities and specific problems, e.g. labor problems combined with unfavorable governments.
4. Determine whether there are hedging or opposite vehicles for each specific risk, as well as more general risks. Energy and airlines are opposite vehicles.
5. View the costs of hedging or contrary investments as an insurance premium, much like what you might pay to fully insure your home or jewels.
6. Rearrange your assets with the potential gains and losses, including the theoretical insurance premiums. 
7. Repeat once a year.

Please share your thoughts with me on the subjects and approaches mentioned.

 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/07/july-4th-lesson-need-to-hire-wise-not.html

https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html



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 - 2018

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

July 4th Lesson: Need to Hire Wise, not Just Smart People - Weekly Blog # 636

Mike Lipper’s Monday Morning Musings

July 4th Lesson: Need to Hire Wise, not Just Smart People

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

Bear in mind, many smart people are taught lots of valuable lessons in schools and search for answers that look like test questions in terms of simple (straight line) answers. Wise people are educated through their own experiences and the experiences of others. This is the main reason many smart people do not achieve lasting success in various activities, including investing.

Current Dilemma 
Almost the entire globe is being worn down by the Coronavirus plague. We will probably only exit the current economic and political conditions and enter the “New Normal” when either effective medical treatments or vaccines are in large supply. This is a smart, but not a wise view based on history. The fatality rate currently reported (including the estimate of undiagnosed Covid-19 cases) is undeniably tragic, but is low compared to historic experiences.  Conversely, public reaction has been unprecedented in size and scope.

What are the differences causing all this turmoil? 

1. The rampant fear of the unknown and the uncertainty of the depth and duration of the impact of the pandemic.
2. The stress of the “lockdowns” caused by the shrinking of the economy and changing political conditions.
3. The speed at which it has happened and its continued acceleration. 

In the desperate search for a “New Normal”, people do not remember a quote attributed to Lenin “There are decades where nothing happens; and there are weeks where decades happen.” The revolutions Lenin instigated may have impacted more than half the world at one point.

American Revolution
This blog is being written on the day after the US celebration of July 4th, Declaration of Independence. I believe this 18th century revolution, supported by a fraction of those living in the country at the time, is still impacting the world to an extent even bigger extent than Lenin’s efforts. To a large degree the American Revolution began the New Normal for most of the world. While it is still evolving, a new normal may be entering the globe, potentially impacting commerce and consequently the political sphere. Thus, it makes some sense to grasp how much time it took to complete the first phase of its new normal.

The Boston Massacre and Boston Tea Party were the first skirmishes in 1773. These were reactions to perceived unsuitable taxes and were followed by the first Continental Congress in 1774, leading to a somewhat unpopular war which ended with very appropriate march music by the surrendering British soldiers “The World Turned Upside Down”. The real revolution came to the political sphere in 1781 when the Articles of Confederation were passed, giving an unsatisfying structure to the 13 independent states. To address its deficiencies and to create a central government, the US Constitution was passed in 1788. Perhaps, more important in today’s environment is the  Bill of Rights, passed in 1791. The first major test of the American experiment came in 1797 when George Washington’s second term ended in the peaceful succession to Massachusetts lawyer, John Adams. (George III, and many elsewhere in Europe predicted Washington would be crowned King, or would be replaced by a “strongman”. Similar to what has happened recently in Russia, China, and parts of Africa.)

Thus, the functioning “New Normal” took 24 years before it was viewed as secure and essentially lasted until the Civil War broke out. Most current history written about the Civil War lists slavery as being the cause of the War. This was the same issue that occupied much of the wrangling by the members of Congress in producing both the Declaration of Independence and the US Constitution. In both cases the Members concluded that they could not agree on perfect documents and accepted a compromise. What really broke the impasse was economics in the form of import tariffs, something generally not credited and one of many failures to teach accurate history.

The main source of tax revenue for the US Government until the 20th Century, excluding the federal income tax during the Civil War, was money from tariffs. These were quite favorably supported in the North, as they gave price protection to Northern manufactured goods. Those in the South saw tariffs as hurting the export of their cash crop, cotton. The southerners were already being squeezed by the declining economics of slavery. As is often the case when economics is important, it is hidden under more acceptable social causes.

Translating to Our Search for a New Normal

1. I believe the various medical solutions for COVID-19 and its aftermath will take longer than expected to reach a reasonably affordable conclusion. 
2. The trend to work at home will evolve, but we will not see the same number of people working every day in large offices.
3. There will be continued growth in shopping over the internet.
4. Education will increasingly be delivered over the internet, with some necessary exceptions. Furthermore, schooling will be focused on current and particularly future employment needs.
5. The military will be focused on a combination of raids and electronic warfare.
6. Supply chains will be rationalized, both for security and economic advantages.
7. Travel will be streamlined and made medically safer.
8. Politics will revert to the former House Speaker Tip O’Neill’s view, that all politics is local.
9. We will live longer and more expensively.
10. My strongest view of all is that I will both be wrong and surprised.

What to Do?
What is taught in most business, finance, management, and economics classes, success is based on formulated planning. I have been both a reasonably successful private company entrepreneur and an investor in competitive fields. It is my belief that success is based on finding the right people and having them evolve in the right jobs.

In terms of picking successful funds to invest in over long periods of time, the skills and culture of management has been crucial to the result. One of the better ways to guess whether management will make the profitable decision is to look at how they handle the myriad of short-term details that surround any activity. Most companies have reasonably good management in particular portions of their business; however, going beyond the borders of that expertise adds to risk without the addition of new talent.

As fund investors we are believers in well-diversified portfolios of concentrated funds, when they can be found. When they cannot be found we invest in low cost broadly invested portfolios.

Where are We Now?
Short-term, until at least the election or longer if there are meaningful changes. One should recognize that in terms of stocks and stock funds the attention of the market has become more speculative, as shown below:

1. In the first half of 2020, mostly in the second quarter, there have been 64 IPOs on the NASDAQ raising $19.11 billion and 33 on the NYSE raising $15.44 billion.
2. While both the DJIA and S&P 500 are still below their former highs, the NASDAQ Composite has gained +13.76% year to date, including dividends.
3. Precious Metals funds for the first half are up +21.76%, Global Tech funds +19.74%, Tech funds +15.56%, and Large-Cap Growth funds +11.92%. There are 21 peer groups positive for the year.
4. As a contrarian indicator, this last week was the third week in a row that the AAII sample survey had a bearish reading over 40%.

Fixed Income Funds

1. Europeans expect mid-term inflation.
2. Mortgage applications are at their highest level since 2008.
3. The default rate for speculative issues is 12.5%. Credit defaults are expected to rise in a prolonged recession.
4. The Big Fear – a trifecta of Democratic victories. Based on history it is unlikely. If it happens, except in the case of the current administration, when has a politician delivered on campaign promises?

Conclusion
Long-term investors should maintain equity holdings and look to add selectively overseas. Shorten up durations on fixed income.

 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings-new.html

https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html



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 - 2018

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

“New Normal” Unlikely to be a Repeat - Weekly Blog # 635

Mike Lipper’s Monday Morning Musings

“New Normal” Unlikely to be a Repeat

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

Analysts love history, believing the future will be a repeat of the past. Almost every force for change today is itself changing. There is so much changing that there is a great temptation to retreat to cash or a central value index. Quite probably, the least realistic and useful diagram for the future is a straight line. However, there are a series of mathematical manipulations that may be useful in identifying the multiple “New Normals” we will go through.

I believe it was in the second year of algebra that we were introduced to simultaneous equations. In these equations each formula has a different unknown, requiring each to be solved before completing the entire equation. There were other useful exercises that could also be helpful in our search for an investment strategy. The first, which was mislabeled as geometry rather than logic, was proving theorems. In that exercise we segregated math formulas between those that supported the theorem and those that did not. The correct solutions were based on the logic displayed, not the number of pros and cons. Perhaps the most useful math we learned was the math dealing with circles and semi-circles. I believe that learning to think in circular patterns is much more representative of the reality of human (market) behavior.

Where We Are is More Important Than How Far We’ve Traveled
Utilizing the two-sided balance sheet approach, I will divide the current inputs between those I perceive as positive for long term investing in equities and stock funds vs. those that increase the risks of losing money.

Positives
In analyzing data we look for indicators that on balance successfully predict the future. Positive indicators are normally correct more than half the time. However, what is even more valuable are the rare negative indicators. On a contrarian basis they are correct more than 75% of the time.

1. One of the best negative indicators is the sample survey of the American Association of Individual Investors (AAII). In the latest week, for the second week in a row, the survey is increasingly bearish, 48.9% and 47.8% respectively. A more normal three-part distribution has numbers in the thirties, as it was three weeks ago when it was 38.1%. Rarely do the weekly readings go over 40% and it is extremely rare for any choice to exceed 50% for the six-month outlook. 
2. Private clients at a large US brokerage firm bought equities for the first time in eleven weeks.
3. Individual investors are not constantly wrong, although they tend to make up their minds slowly and consequently tend to be wrong at turning points. (Data is no longer corrected on transactions below 100 shares, so we can no longer use the odd-lot theory.) If we look at total flows, we see net purchases of $11.3 billion for fixed income securities and funds, including $2.6 billion going into TIPS and $5 billion net outflows from Equity. These flows are forcing the prices of fixed income products up and their yields down. This reflects market action and is not a predictor of future interest rates.
4. We appear to be in two different markets at the same time. The daily stock price chart for the NASDAQ Composite is in an uptrend and has been establishing new highs. The other two main market index price charts look to be forming a temporary top, despite 24% of the S&P 500 being invested in FAANG stocks plus Microsoft. In 2013 the same stocks represented 9% of the index.
5. Rising freight volume carried in trucks is expanding, leading to capacity expansion.

Negatives

1. The Citigroup Panic/Euphoria Model is predicting a bearish period one year away.
2. Investors are pouring money into fixed income, even though there is a long-term expectation for higher interest rates driven by inflation. One example of this is a repeated issue of a 100-year bond from Austria, a country without a particularly bullish outlook. A pitch used to sell very long bonds is that it avoids having to make more frequent decisions, which can be wrong!!!
3. Some US investors are investing outside the US or the dollar. Of the 25 best performing mutual funds this week, 16 were precious metals funds (gold), 3 were emerging markets funds, 2 were China Region funds, 2 were India funds, and only 2 were invested in domestic small caps. Except for the precious metals group, the individual holdings in the other 9 funds appear more important that a sector bet.
4. The VIX indicator of worry is selling at twice last year’s rate.
5. Friday’s volume rose, which is not normal in the summer months, revealing interesting results that need to be further examined. The stock of T. Rowe Price lost 7.62% for the week, even though it published good results. On Friday, Janus Henderson had a market volume of 10.66 million shares, where the normal volume is 1-2 million shares.

Conclusions

1. We should not expect some clear straight-line news any time soon. That is not to say various pundits will not extoll these points of view, but on careful examination the precision of their views will come into question.
2. Despite what various political leaders state, we live in an increasingly integrated world and that is a net good thing, although it has a price, among other difficulties.
3. At today’s prices we are being paid to take long-term equity risk and are not being compensated similarly for fixed income risk taking.
4. We should focus on the announcement of capital expenditures in order to see how much is being invested in new products and new distribution, or see if it is being used to lower existing costs.

What Do You Think?   

 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/06/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html

https://mikelipper.blogspot.com/2020/06/caltech-data-heretics-go-to-track-for.html



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 - 2018

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

Selecting Time Horizons is Critical to Investment Success - Weekly Blog # 634

Mike Lipper’s Monday Morning Musings

Selecting Time Horizons is Critical to Investment Success

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

To feel successful we play games with ourselves. Both the sports and business pages are filled with “puff” pieces about the extraordinary successes of a limited number of people. We could choose to model ourselves against them, but should we? For a very brief period at age 21 I was disappointed that I, like Alexander the Great, had not conquered the known world. I quickly learned to find more achievable goals, which have changed throughout my life. Those lessons have been applied to the construction of client and personal investment portfolios. One of the advantages in managing portfolios of funds and securities, distinct from having all my assets in a single business, is that I can segregate the single portfolio into distinct time horizon sub-portfolios.

Now I believe it is critical that we recognize that we may be changing speed and direction for up to nine months. Since the 19th of March we have seen average mutual fund performance gains of +37.22%, led by small-cap growth +45.37%. Even “Value” funds on average have risen +30.88%. (As expected, some sector funds did even better:  Equity Leveraged Funds +68.51%, Energy MLP +67.51%, and Precious Metals +51.60%) Above average performing funds did even better than their peer averages. Large gains in a short period of time are historically unsustainable.

Most of these gains were produced early in the last 12 weeks. Market analysts warned that a sustained period of base building performance would be needed for a successful attack at the old highs. However, over the next nine months or so the US stock market is likely to be challenged by other hurdles, as shown below, some not generally accepted at this time:

Medical

1. Two distinct additional bouts of COVID-19 are expected, the initial bout, an echo of the first wave. The second in coming in the fall/winter when we normally face the respiratory flu. Typically, deaths from the flu are in the same order of magnitude as the Coronavirus. What we do not know is whether it will impact the “normal” flu. 
2. There are many attempts at potential vaccines and therapeutic medicines that could help, but some will not work as expected. Furthermore, regulatory and manufacturing/distribution issues will need to be managed.

Political

1. While the mass of investors in most of the world are focusing on the US Presidential election, I as is typical am looking elsewhere. The majority may well be correct in their predictions, but as is often the case the impact may already be reflected in market prices.
2. Whatever the result of the presidential election, the odds favor the following longer-term results: 
1. The winner will not be sitting in The White House in 2025, which will weaken the political power of the President.
2. Members of Congress not planning to run in 2024 will focus on the 2022 Congressional elections, where the sitting President will be of less support and power.
3. Within each party there is a growing split. The leadership in both houses may not have the support of both the younger members and the potential presidential candidates.
4. The political structure of the key congressional committees will evolve and it will not be easy getting legislation out of committee and on to the floor. My guess is that we won’t really understand the “inside baseball” until at least March, with little legislation passed until at least May.
3. The key investment battlefield will be in the House, where tax legislation must start. Additionally, the country will be facing various inflationary threats as almost all federal, state, and local governments attempt to get more money. Businesses will also be trying to make-up for the losses or low income of 2020. Some of the inflationary forces will come through legislation and others through the commercial markets. 

Investment Time Horizons Implications
Each investor should set their own schedule of time horizons. At a minimum they should have three: short, intermediate, and long.

• As a guide, but only a guide and not a requirement, I suggest the short horizon cover family needs, like education. 
• Since we have come out of this recession in reasonable condition, I recommend the intermediate time horizon portfolio be utilized to get through the next recession, which could be worse than the present one. 
• The third time horizon should likely be used for long-term medical expenses and estate planning. 

I might assign 20%, 30% and 50% of assets to each sub-portfolio, respectively. You might be different. I am perfectly willing to accept returns near the bottom for my short-term time horizon portfolio. Others may find that too worrisome. I am not too concerned about the near-term hurdles, unless the results generated by the short-term portfolio threaten the ability to fulfill the desires of the second and third buckets.

Addressing Valuations
In my mind I divide stock price valuations into four buckets: bargains, fair, full, and dangerous. Earlier this year I believed that most prices were in the fair bucket, meaning the upside and downside potential were roughly in balance for my short-term sub-portfolio. We may now have passed into the fully priced bucket, at least until the issues mentioned above are resolved. Fully priced suggests there is some short-term price risk, along with less short-term gain. In terms of my intermediate bucket current prices seem to be in the fair range, with a little more upside than downside. My current view is that my long-term portfolio has much more upside potential than downside. As you can see, the investment horizon dictates a view as to valuation/risk.

Current Evidence
On Friday we saw an expansion in trading volume on the NYSE, with stock prices bouncing in both directions. What I found of interest was the volume of trading in mutual fund management stocks, which jumped. In some cases the companies had good performing funds and in others they were turnaround candidates. Apparently the buyers thought the near-term market favored both.

In the WSJ on Saturday, 76% of the weekly prices of currencies, commodities, ETFs, and security indices rose. Contrary to central bank led pundits, it seems increasing clear we will be undergoing inflation in the near-term future. One of the stock groups not going up and in some cases declining, are REITs. This fits an increasingly popular view that the “new normal” will see less profitable malls and office buildings.

As a contrary indicator, the latest American Association of Individual Investors (AAII) sample survey shows an increase in the number of people bearish for the next six months. This is viewed as positive by market analysts. The AAII sample has three choices Bullish, Bearish, and Neutral, with bearish the clear leader. A more positive view for the intermediate-term can be gleaned from a recent brokerage report showing the stock markets of 73 countries in a base building pattern, measured by their advance-decline lines.

Conclusion
For long-term investors, expect some increase in short-term volatility with some temporarily give back of the extraordinary early Spring gain. Life will become clearer by Spring of 2021. The long-term remains positive.

What do you think? 


 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/06/data-driven-reactions-dangerous-weekly.html

https://mikelipper.blogspot.com/2020/06/caltech-data-heretics-go-to-track-for.html

https://mikelipper.blogspot.com/2020/05/mike-lippers-monday-morning-musings_24.html



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 - 2018

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

Data Driven Reactions Dangerous - Weekly Blog # 633

Mike Lipper’s Monday Morning Musings

Data Driven Reactions Dangerous

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

Starting with the unemployment statistics published on the next to last Friday of the month, we have experienced whipsaws for the seven trading days since then, impacting stock prices by approx. 10% from top to bottom. Both the extreme highs and lows were “gut” reactions to the perception of what the numbers signified.

Employment Surge
Each month the federal government announces the level of employment and unemployment based on the week closest to the middle of the month. In this case it was released before the Friday morning opening the week ended May12th. What surprised many people, particularly those who were bearish, was that the number of people employed actually rose instead of declined.

US stocks prices surged and if investors understood when and how these numbers were constructed they should not have been surprised. First, throughout the month of May and into June, various business in largely non-coastal states were reopening, bringing back some of their workers. (The number continued to grow, at least through this last week.) Second, there was a relatively slight change in the classification adjustment as to which people were reported as employed.

The announcement came on a Friday morning, often a low volume trading day during warmer weather. It was probably exaggerated by many of the active traders sheltering at home or beginning a three-day weekend. Furthermore, since March 23rd many stock prices have risen materially. Bank of America (Merrill Lynch) published the Farrell Sentiment Indicator, named after their former great market analyst, showing this rise being the most “hated” rise in history. (The indicator is based on surveyed six month market projections over the prior ten weeks by the American Association of Individual Investors.) Consequently, it was not surprising to believe there were a lot of short sellers. Opening prices jumped and we suspect many purchases were made to close short sales and limit loses, either voluntarily or involuntarily.

Spike in COVID-19 Numbers
On the following Monday, higher numbers of victims of the Coronavirus were announced. The number of tests jumped as did the overall number within hospitals, although few noticed. Furthermore, as various communities open-up from lockdowns, one suspects more people will be tested and quite possibly contract the plague.

Appropriate Investment, Not Trading Reactions
Careful analysis of both announcements should have led one to conclude that first was positive and the second negative, but not to the extremes the market took each impulse. More importantly, the history of market investing for long-term investors is that they are not swayed from their focus on meeting their long-term goals. Unfortunately, a reverse in market direction is often an excuse to plow reserves back into the very investments that created prior losses, doubling down on the prior mistake instead of shifting into sounder investments. Before accepting the results of various statistics you should understand how and why they are constructed the way they are.

We find the same needs beyond investing, as illustrated by the following:

1. In most communities the entry age to grammar schools is calendar based, often with September 30th being the cut off. (Some parents, believing their youngsters are not as mature as they should be to enter school, keep them out and place them in school the following year, giving them a competitive advantage academically, socially, or athletically.)
2. COVID-19 reports end on Saturday, as some communities view the Sunday data as being unreliable. (Interesting, I found the same unreliability when I started to collect and measure mutual fund performance in the 1960s. We could not call back a number of east coast funds on Friday and question their net asset values and dividend data. Thus, we ended our week on Thursday, which is still the practice.
3. For marketing purposes, all thoroughbred horses officially have their birthday on January 1st. One of the elements used to help pick winners in the most difficult maiden races of two-year old’s, was to attempt to find out when they were actually born. In absence of that data the size of the colts and fillies was a clue, as young horses grow bigger with age.  

What is the Market doing?
In the table below you can see that we are going through three somewhat different markets, as captured by various indices. One could assign labels to the three indices in an oversimplification, based on the primary drivers of each: NASDAQ (Seasoned Speculators), S&P 500 (Large investors, particularly with limited research staff), Dow Jones Industrial Average (Media, retail investors, and active traders)

         Date of    % Change   % Change
Index  2020 High   to 6/13    for Week   2020
DJIA     Feb 12     -13.35%     -5.55%   -10.28
S&P500   Feb 19     -10.18%     -4.78%    -5.86
NASDAQ   June 10     -4.31%     -2.30%    +6.87

By losing less the NASDAQ beats the DJIA, although at some point the gap may close.

Another set of year to date data through Thursday is the performance of the three leading mutual fund sector averages:  Global Tech +9.48%, Domestic Tech (largely domestic) +6.66%, and Precious Metals +6.37%.  Large Cap Growth funds +4.42% and Convertible Securities funds +4.26% were also leaders.

An Unheralded Way to look at National Data
As evident to all our readers that I pour over all sorts of data to help me think through the investment problems of our clients. The ensuing discussion looks at our economy in a very different way for analytical purposes, not to begin a discussion as to individual and national priorities. The data quoted is from Wikipedia and covers federal data through 2019 and state/local data through 2015. If the combination of federal, state, and local government data provided to and for our people was done by private enterprises, economists would label it as services activity. There is probably no single recipient of these services that approves of how the combined expenditures of federal, state, and local governments are spent. Nevertheless, out politicians believe that enough people approve of each item, although for the most part we have not been asked.

The math includes not only those items paid for by income taxes, but also sales and use fees. (Thus, the cost of your drivers’ license, registrations, admissions to parks, and utility fees are included.) In fiscal 2019 the Federal government reportedly spent $7.3 trillion (34% of GDP). States spent $3.7 trillion and local authorities $1.9 trillion, for a combined total of $12.9 trillion out of a GDP of $21.4 trillion, suggesting the combined governments are spending about $39 thousand per person in this country. You can dispute the accuracy of the numbers and adjust for the very likely increase in governments spending in this year of lockdowns without meaningful government lay-offs. Any number between $20,000 and $50,000 per person is a large number, assuming the working poor brings in $20,000. The average working person has become middle class. Those with children and other non-workers are not doing badly either, compared to people all over the world. This is not to say we have developed an efficient system to provide critical services to all our inhabitants.

These issues will only become more binding in the future and have been with us for a long time. Since 1990 the Federal portion of total spending has grown at a rate of 4.6% per annum and taxes at 4.3%. I suspect State and local spending has grown faster, but taxes and fees have probably risen close to the same level.

The growing gap of spending vs. revenue generation cannot continue forever. As a corporate stock owner, I wonder whether these concerns will lead to lower profit margins and dividend growth.

We need to get some of our best minds to work on this.

 

Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/06/caltech-data-heretics-go-to-track-for.html

https://mikelipper.blogspot.com/2020/05/mike-lippers-monday-morning-musings_24.html

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



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 - 2018

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