Mike Lipper’s Monday Morning Musings
Fragments Prior to Fragmentation
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Historic + Military
Learning
Some have said, if you
scratch a good security analyst a historian will bleed. If you add in two other
variables, learning from military training and exposure to the racetrack, you
will understand much of my thinking. In fearing World War III, one should start
with the German General Staff study of the American Civil War and the Peace
efforts prior to and post WWI. Long periods of relative peace can be achieved most
of the time if intelligent leaders continue to plan for economic and military hostilities.
Since we don’t know
what the future will bring, we should study every fragment of information
available and track developments that might lead to dangerous conflicts. Few peacetime
leaders are equipped to be successful war leaders, and often they make war
inevitable. I believe a lesson from one of the various “war colleges” is that
war is another way to conduct political change. Our political leaders increasingly
use an “anything goes" approach to cling to power, ignoring the vulnerabilities
they are exposing for our adversaries to exploit.
In retrospect, it
has become increasingly clear that WWI and WWII were inevitable. The threat of
nuclear war and some of our world leadership has held off WWIII, hopefully
forever. Due to improvement in tactical nuclear and other weapons, there is
greater risk today than in the past. We need to review all fragments as they
appear and be watchful of those which could harm us.
Dangerous Fragments
Past & Present
In the 1920s, the
general urban population looked askance at criminal controlled bootlegging but
enjoyed the local speakeasies. Today’s version of this attitude is the general
disrespect for most members of Congress. Although they continue to support
their local representatives, or for the younger set, the local ‘pusher”. We seem
reluctant to reform our own process of offering debt forgiveness in the hope of
gaining votes. They don’t seem to see these stimulants as bribes, much like the
circuses that led to the fall of the Roman empire.
Daily Stock Markets
React to Central Banks Words
On Thursday, 27 % of
the “Big Board” stocks declined, with 38% falling on the NASDAQ. The next day,
64% of NYSE issues fell, with 63% falling on the NASDAQ. The only difference was
many traders finally believed the clues given regarding the possible number of
interest rate cuts this year. (They paid no attention to the view that the next
rate move by the Fed could be up.) Most of the time investors stay focused on
their long-term needs and don’t react to politicians and pundits.
Fragmentation
Becoming More Popular
On many days more
stocks go up than down. This week, 21 of the 28 foreign markets Barron’s tracks
rose. However, in the US only the momentum index has gained double digits over the
last two months.
What is the
Remaining Upside Left?
While it is popular
for market leaders to mention their gains from the bottom, the payoff for today’s investor is
what is left? Jeremy Grantham, Chair of GMO, has generally held a bearish view
but has generated good long-term performance for the funds he supervises. He
mentions that if one uses the Shiller P/E, the market is in the top 1% of its
history. A more significant observation is that many analysts use both P/E and
profit margin, which are linked, so they are double counting. (Profits =
Earnings, which is the driver of margins)
Today’s Parallels
with WWI And WWII
Russia is in
fighting a war in Eastern Europe, with Western Europe supporting the locals. The
US is in a trade war with China and is constraining trade. Our opposition is
getting stronger, although we are having trouble convincing people that they
need to fight. This reluctance exposes our current weakness to our adversaries,
giving them reason to cheer.
The markets generally
seem to be ignoring the geopolitical hot spots accumulating around the world.
There seems to be a perception that we can ignore these problems as they are
occurring in some distant land. However, these problems are now surfacing closer
to home and their citizens are increasingly arriving at our borders and making
their way into the country. The situation is putting significant strain on
resources and budgets, at a time when pet projects are already being funded in
the hope of attracting the support of an expectant electorate. This spending is
unsustainable in the long-term and creates additional vulnerabilities for our adversaries
to exploit.
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Mike Lipper’s Monday Morning Musings
Collateral Rewards, Risks, & Opportunities
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Motivations
The attempt to be
successful and original is hard work, as being an originator seldom leads to investment
success. Better results come from striving to be an early participant in an
investment idea. Great individual analysts search for a single great idea,
usually an idea that few if any recognize.
Somewhat later and
perhaps deservedly less successful are those who are early recognizers of those
with great investment ideas or themes. The second group are collateral players,
including public and private pundits working to identify these opportunities.
At one point in my
professional life, I was a candidate for the first group. I devoted some of my
time as an analyst to visiting plants, doing walking tours of workspaces, and attending
industry sales presentations or government conferences. In order to accomplish these
tasks, I often commuted on the earliest and latest trains. In addition, I also read
numerous trade journals, which I no longer do.
Today, my “remote”
research consists of reading or watching business communications, visiting buyside
managers and their analysts, and walking through shopping streets and malls. In
effect, my first glance at new products and services is when they are
introduced to the buying public, so I am going to be late in recognizing new trends.
The only offset I have is my prior experience, having seen many things in the
past which may have some bearing on present and possibly future trends.
What Are Most
Missing
Much has changed in the sixty plus years I have been watching.
Questions Need to be Asked?
Net FreeCash Flow$ Billion
Goldman Sachs $143
JP Morgan Chase 87Apple 85Google 69
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Different - Weekly Blog # 825
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rights reserved.
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Mike Lipper’s Monday Morning Musings
Alternative Futures
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Could the Future be
Better?
While most stock
indices are rising, most bond indices are falling. Normally, fixed income investors are more risk
aware than future oriented stock buyers and owners. Some near-term economic
indices are rising, while public company managers are laying workers off. (Each
worker is an investment of the company, which represents a reinvestment cost if
eventually replaced.) Why is this happening when current sales are reasonably
acceptable? To many businesspeople, their next planning period look bleak, despite
what many political leaders say.
The current
President is rushing into the 1930s FDR future. This has been magnified by an
employment shortage in the prior engine of world trade growth, China. The
general assumption in the US is that the current leadership won’t change.
Perhaps more
important to the world is the statement by Xi, the paramount, but not sole leader
of China. He is advocating “High Quality Development” = National Security,
Political Stability, and Social Equality. With 90% of the population in the
private sector, the level of employment is critical for stability. (China has a
history of rebellions starting in the south, with some succeeding in changing the
government. Their military posture is more defensive than offensive. However,
their defense budget increased 7.2%, which does not include the 30-35% spending
on science and space.
Other Items of Significance
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Mike Lipper’s Monday Morning Musings
Bullish Chatter Leaves Out Useful Info
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Public Service Announcement
Assuming you have
been unable to avoid the bullish chatter from various media pundits and investment
organizations, I will not repeat the positives on investments. Instead, I will
file a “minority report” of little-known negative factoids to give some balance
to your thought processes.
Layoffs Continue
Most publicized layoffs
are from durable goods producing companies. It is the service providers that really
drive the US economy, contributing over 70% to GDP when the service functions
of manufacturers are included. When service companies encounter economic
difficulties, they tend to cut back gradually rather than in lump sums. They are
also less unionized and tend to provide fewer announcements. I therefore tend
to pay more attention to the layoffs of service companies. That is why when
Expedia announced this week that it is reducing its workforce by 9% it is worth
paying attention. It is probably the tip of the iceberg above the waterline.
Rare Counter News
The senior
strategist for JP Morgan Chase suggests we are in a period of Stagflation
(slowly rising prices and wages). The clue to this analysis is the most
prominent portrait in the White House main room where the current President
meets foreign dignitaries and congressional leaders. It is no accident; the
current White House occupant’s favorite President was FDR. In the second half
of his term which converted a cyclical recession into a period of stagflation.
When the Public are Invited
into what was Formerly Private, Beware!
Private lending has historically
been conducted exclusively between a single borrower and a small number of
financial institutions; all without the “benefit” of government review. Some
financial firms are now offering pieces of private credit to the “unwashed”
public. It is not only because some members of the public have accumulated
cash, but also possibly due to federally sponsored inflation. Some believe
there is now more risk in private credit than in the past.
Speculators are Buying
More Than Institutions
In the latest week,
39% of the shares traded on the NYSE were at rising prices, with 60% on the
NASDAQ going up. I suspect there was more institutional volume on the “Big
Board”, with some having a longer-term outlook than the public or their
advisers.
Be Careful of Labels
Many market
prognosticators currently worry about the size of the gains chalked up by large
“growth” companies, advocating for a switch to small caps. As someone who has
invested in both individual small caps and more significantly in funds invested
in smaller caps, I am concerned that the data used to support their long-term
desirability is faulty.
Compared to larger
stocks there is a problem with the data due to survivor bias, both for the
winners and losers. Some wonderful or seemingly wonderful companies have had their
history cut short by being acquired. At times, some of these companies are
sought after because of apparently superior products, leadership, or customer
base.
The sellers believe that
the price paid compensates them for giving up some of their potential gains, but
it also assumes it reduces their business and personal risks. Many performance
histories capture their partial performance for the extended period in the
published record, as the history of bankrupt companies is kept in the small-cap
record. Additionally, the significance of the bankruptcy record is diminished due
to their prices typically being much smaller than most acquired companies.
This data concern
should not rule out investing in small-caps, although it suggests small-caps are
neither a plus nor a minus for selection. Similarly, college selection should
not be based solely on first grade class ranking.
Stock Selection vs.
Portfolio Management
There are many ways
to win or lose a football or baseball game. Some variables deal with the play
of a particular contest, while others must consider the season, player
development, audience development, funding needs, and the career progress of
key individuals. Sounds complex!
A similar set of
puzzles are used to solve the issues of stock selection and portfolio
management. In this country, a large portion of the population has an opinion
on how the game should have been played, at least for the audience. Predictability
improves as one lengthens the time from a single game to a season. For companies,
factors like the number of years, loyalty development, and careers might be important.
In the fullness of time the last two periods are the long-term payoffs for the
real winners, who are small in number but rich in experience and profits. For
the most part, success can only be achieved through experience. There is very
little written about how to achieve success.
Turning to
successful long-term investing, the same complexities exist. These are the problems I face in my life work.
Producing these weekly blogs is one way I hope to think through the issues.
Unlike some great investors, I limit my focus to individual equities and funds,
excluding fixed income, commodities, and critical sources not in English.
You Can Help by Sharing
Your Experiences, Particularly When You Believe I Am Wrong.
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Mike Lipper’s Monday Morning Musings
Caution: This Time Is Different
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Warning
The standard excuse
for breaking the historic pattern of following precedent is the current
situation being fundamentally different than the past. The break in historic pattern
makes it appropriate to not copy the past pattern of each substantial rise and decline.
The problem with the
old pattern is that it is two dimensional. If it is going up, it will next go down.
However, the next driving direction may be diagonal or a collection of reversing
diagonal moves.
Worst News for The
Leadership
One or more
diagonals will upset political leadership, leaders of business, military,
non-profits, education, and others in a position of responsiveness. One example
is the CEO of Walmart, the largest retailer in the
world. He noted that in the general merchandize category the US was in a
deflationary price trend. However, in the grocery category the prices of some
items like eggs, apples, asparagus, blackberries, paper goods, and cleaning
supply were simultaneously rising. (The first four items are classic supply and
demand oriented. The last two have significant manufacturing cost elements in
their cost structure.) Is Walmart suffering from inflation
or deflation?
There is a third
input caused by substitution. Packing fewer items in a smaller package lowers
the price but increases the frequency of purchase. Still another substitute
would be lowering the quality of goods and services sold, such as producing less
powerful batteries for hand-held devices.
Consumers and
Investors Are the Real Losers
The unsuspecting
real losers are consumers, investors, and any on the receiving end of actions
served up by organizations relying on classically trained economists. They make
these judgements about the quantity of goods and services. (Have you noticed
the dexterous taste of meat and other agricultural products due to cost-cutting
providers!)
There Are Other
Numbers that Drive Investment
There are often other
reasons companies are acquired. This week it was announced that Capital One, a
Virginia Bank with a very large credit card business, is attempting to buy
Discover Financial (*), also a very large credit card bank. If permitted, the
transaction would create a card processor as large as Mastercard and Visa. This
could change the entire credit card and consumer bank businesses.
(*) Owned in personal
or managed accounts)
On Saturday,
Berkshire Hathaway (*) issued its annual report and shareholder letter. (A copy
of my internal reaction to the letter is available to our blog subscribers by
sending me an email at AML@Lipperadvising.com) The shareholder letter mentioned that their BHE owned utility served
the population of ten midwestern and western states. (To the best of my
knowledge this is an unrecognized and unused asset which could be of great
marketing value in the future. It is the sort of non-balance
asset that represents hidden value not tabulated in government records.
Another example of a
business asset transforming into a financial asset capable of changing the
nature of competition in the securities markets surfaced this week. This was captured
in the following headline from the Financial Times “S&P Global nears deal
for Visible Alpha in effort to compete with Bloomberg.” (Shares in S&P
Global are owned in proprietary accounts.) Visible Alpha collects research
reports from major Wall Street firms and distributes them electronically. It
thus attaches additional value to research, beyond that provided by the
originating firm and their direct clients. If the deal goes through the
consortium of firms will probably pass the proceeds back to the issuing houses,
partially converting an expense item to a capital item.
A “Smart Money” Bet
on Market Direction
Regular readers of
this blog know that my primary investment academy is the racetrack. Always
trying to improve my results I learned to look at what I thought was the “Smart
Money” at the track. Applying that principle to investing I see a decline as the
next major move, for the following three reasons:
I consider all of
these to be bright people and consequently advocate building up trading
reserves. However, I also recommend maintaining significant permanent equity positions,
as I could be wrong.
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Mike Lipper’s Monday Morning Musings
What Moves the Stock Market?
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Fearful Challenge
A common mistake many
people make is confusing the credibility of spiritual leaders and markets
pundits. Professional preachers proclaim their belief in what will happen in
the fullness of time. Stock market pundits, who are not as bright or skilled as
many religious speakers, make the mistake of being more specific about dates
and price levels. At best, market prognosticators can occasionally be right about
dates and/or prices, but rarely both at the same time.
With all their
mathematics and computer skills, recorded history suggests the future should be
knowable in every instance. While we have great precision as to what happened,
we don’t know what caused people to do what they do. Since we don’t
rigorously examine our deep emotions for each action, we may not know
exactly why we bought or sold something at a particular point in time.
Best We Can Do
The best we can do
is identify what we think we knew at a particular point in time. Investors currently
have a plethora of prices and other indices available to them, but rarely a
record of emotions. Furthermore, our decision-making process evolves over time,
influenced by current leadership and the ideas of other people.
Because we only know
or remember the numerical data surrounding our decisions, we attribute our
decisions exclusively to numbers. I believe this is why in looking at
financial history we tie our decisions exclusively to the known numbers. It
is the main reason many of the numbers do not generate good predictions. I
would not be surprised that the track record is only 60%-75% accurate. (This
falls under the old label of “good enough for government work”.)
Thoughts on the Day
of the Decision
There are only about
240 days a year when most investors can execute an order. Most investors probably
trade less than once per month, with institutional investors trading less than
8 days per month in their long maturity portfolios. Consequently, most
investors are not active most days, with nothing spurring them to action in
each portfolio. Additionally, the spur to act may occur on quite a different
day than the trade, unless price is the cause. Thus, it is difficult for an
outsider to identify the ultimate cause of the action.
What Could Have Been the Critical Fact Last Week?
Too Narrow a Focus
on Inflation
Inflation is caused
by an imbalance between supply and demand for an undetermined period of time. It
includes the follow elements: supply or demand shocks caused by weather, accidents,
government actions like tariffs and other impediments to free and/or easy
trade, and partial or complete military mobilizations. (In terms of the current
US situation, the federal government is the single largest contributor to
inflation, followed by union management pay demands.
Calendar Guide
While the calendar
year is already more than 10% complete, we probably have not seen the most critical
announcements of the year. Considering we have a probable lame duck president, divided
political parties and a split Congress, this may be the time to build a higher-than-normal
cash reserve to be used to buy some sound investments for the remainder of the
decade.
What Do You Think?
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Historically - Weekly Blog # 821
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Mike Lipper’s Monday Morning Musings
Picking Winners/Avoiding Losers
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Mindset
Every investor,
speculator, analyst, portfolio manager, and politician’s job is to find winners
and avoid losers. My fundamental training for accomplishing these goals for my
family and others relies on my training at the racetrack.
The first requirement
for success is recognizing where you are and periodically admitting when you are
not right, which is distinct from being wrong. Right now, I admit I have been
wrong. Using the S&P 500 index’s closing price performance on Friday plus a
minimum 3% premium, WE’VE APPERENTLY ENTERED A NEW BULL MARKET.
This assertion is based
solely on the numbers, although there is considerable short and long-term evidence
to the contrary. Nevertheless, one lesson learned from the track is admitting your
mistakes when holding a losing ticket. Learning something from your mistakes should
often make you a winner. Mistakes are both normal and repetitive. The most
valuable lesson is learning how to avoid them in the future.
Current Contrary
Conditions
The latest stimulus
for the market was surprisingly strong Labor Department jobs numbers, which probably
disagree with the household numbers due to an increase in the number of people
working two or three jobs. Perhaps more significantly, there were 601,000 more
government workers than the 257,000 in domestic manufacturing. (Productivity is
difficult to calculate accurately, and it is hard to value its worth. Perhaps
the same could be said about the number of government workers.) Hardly a week
goes by without an announcement by a large employer laying off 10% or more of
their workforce. Those laid-off but receiving some settlement should not
qualify for government pay. There are secondary layoffs which don’t normally
get noticed, such as Abrdn cutting its use of Bloomberg terminals.
Longer-Term Worries
Structurally, we and
the rest of the world are living more expensively. For the US it can be summed
up on a secular basis. Total interest costs are already larger than defense and
Medicare costs combined. An aging population with rising medical
costs, fewer workers, and more expensive weapons, among other things is driving
these expenses.
History does not
exactly repeat itself but does rhyme. Technology changes, but the way people
act rarely does. It is quite possible we have been in a period of low
productivity and stagflation since the COVID years, paralleling the 1930s with some of the aftereffects of the 1940s. Hopefully we will not waste time and money trying to
spend our way out of it, although current leadership around the world seems to be
imitating those back then.
How to Invest
Recognize that the
betting odds do not favor straight-line extrapolation. We individually will
have to move cyclically and at times it will be unpopular with current opinion
leaders. Some suggestions won’t work or will only work infrequently.
Targets of Opportunity
Please share your
targets and progress with me.
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Historically - Weekly Blog # 821
Mike Lipper's Blog: 2 Media Sins Likely
to Hurt Investors - Weekly Blog # 820
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Mike Lipper’s Monday Morning Musings
Is This “Bull Market” Real?
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Government vs.
Market Participants
Late last week the
Department of Labor announced that 353,000 individuals were hired. The announcement
was credited with a sharp increase in US stock market indices, followed by surges
in some other countries. The validity of this information was not confirmed by other
data sources. The household survey showed only 170,000 people being hired, less
than half the 353,000 reported by the Department of Labor. (Many professional
economists in the private sector prefer to use the “household survey”. The main
difference is the Labor Department uses the number of individuals receiving
compensation, whereas the household survey counts the number of the people
working. Under current economic conditions, the number of people with second or
third jobs has been growing, resulting in a significant difference between the two
sources.)
Whatever the reason for
the difference, media pundits and left leaning politicians issued encouraging
statements suggesting the so-called single cause of inflation, jobs, reversing and
a new bull market in stocks beginning.
The problem with this
assertion is that for the week both New York Stock
Exchange (NYSE) and NASDAQ market participants sold more shares than they bought
and more stock prices declining than rising. There are two other statistical
surveys which also cast doubt on the pundit’s conclusion.
Before the
Depression there were a few market analysts who believed new price trends should
be confirmed before they are believed. A decision rule was formed requiring a
trend be confirmed by a further price movement of at least 3%. (I have not seen
a current measurement study, but the market expansion could require an increase
of even more than 3%.)
One of the market’s
wise tales is that the “public” is always wrong. Numerous studies have shown
that on average this is quite wrong. However, the public are often wrong in staying
too long with a trend. Depending on which market indicator is utilized, the US
market has been rising since late 2021 or early 2022. One could say the trend
is long enough and it could be due for a reversal.
I tend to use the Standard & Poor’s 500 (S&P 500) as my single
measurement device. It recently reached a new high of 4844. Applying the 3%
rule, a close above 4989 is needed to confirm a new bull market. I am convinced
it will happen, but possibly not now.
The best measure of
public trends is currently the weekly sample survey produced by the American
Association of Individual Investors (AAII). The survey tracks the bullish, bearish, or neutral expectations of investors
for the next 6 months. The statistical “norm” for each of the 3 choices is in
the range of 30%, with an extreme reading being 50%. Professionals believe an
extreme reading can’t be maintained for too long a period before it is marked
down. Analysts use these readings as contrarian indicators.
I have slightly
refined the 3% rule and suggest a reading be rated extreme when the highest performing
observation is 2 times that of the second highest. Guess what! The latest
bullish reading is 49.1%, with the bearish reading at 24.5%. BOTTOM LINE, I AM
DUBIOUS A NEW BULL MARKET HAS BEGUN. I prefer to wait until both the election
and chairs of the various critical congressional committees are identified.
Question: Will you share
what measures you use to identify bull and bear markets?
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Lipper's Blog: Worth vs Price Historically - Weekly Blog # 821
Mike Lipper's Blog: 2 Media Sins Likely
to Hurt Investors - Weekly Blog # 820
Mike Lipper's Blog: “SMART MONEY” Acts
Selectively - Weekly Blog # 819
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Mike Lipper’s Monday Morning Musings
Worth
vs Price Historically
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Merchants Needed
Despite what many believe
is the oldest profession, growers and herders were the first tribes to survive.
As both tribes frequently had more of their own product than necessary, they needed
to exchange their excess production with members of the other tribe. Both tribes
were skilled in their own production but did not fully understand the other
tribe’s costs. Initially, the agreed price was in terms of quantities between the
two commodities (x sheep for y bales of cotton).
Fairly quickly, solely
mathematical terms of exchange (3x for 5y) became insufficient in terms of defining
the starting quantity and conditions of transfer. The exchanging parties often did
not know or trust the other party. Thus, there was a need for a middleman to determine
an agreed price between buyer and seller. The middleman would necessarily be
known or recognized by the would-be traders as someone who could be reasonably
trusted and was capable of developing accepted terms of trade.
With buyers and sellers geographically
separate, both in terms of distance and possibly language, the value of a somewhat
trusted third party became even more important. Still further elements became
essential, a recognized type of money, or later, credit.
Over time, the third parties
evolved into merchant houses or merchant banks. When dealing across borders and
cultures the participants were often happier if the money or credit exchanged was
issued by a bank, especially if the bank
backed by a government with a wealthy family behind it. At this point these
transactions utilized money in the form of coins convertible into known
quantities of precious metals.
Foreign Exchange
When the western world
was ruled by Rome, the value was understood to represent an understood bundle
of goods and services. This worked well when the government controlled the
coinage. A problem arose when government expenses for war or extravagant expenses
rose beyond an acceptable level of taxes paid. A conflict that exists today.
Governments addressed the
problem by gradually debasing the currency, such as substituting copper and other
base metals for precious metals. As governments did this differently, the purchasing
power of their money became dissimilar to one another, both in ancient times
and today.
Those who suffer from a liberal
arts education are taught incorrectly that the English Magna Carta was forced
by the public on the English king. The real cause resulted from the Barons revolting
against the increased tax load on their land. The increased tax load was caused
by the expense of the Crusades and the ransom paid for the release of their
king who was held hostage in Europe.
Today our federal
government is changing the rate of taxation and how it is applied to both
income and estates. Since foreigners derive earnings from activities and trade in
the United States, they react by reducing their exposure to the US dollar, reducing
its value. This is currently an issue for an investment committee on which I
sit. In looking at our portfolio and foreign expenses at the last meeting, I suggested
we begin tracking the changing value of the dollar. It is also something I need
to do in looking at portfolio selection.
A Historic Portfolio
Change
(Please do not take this discussion
as a recommendation, as that requires careful analysis of the needs of an account.
T. Rowe Price is held in a personal account and some client accounts.)
The man, T. Rowe Price,
started his investment counsel firm in 1937, a year of a few months of gains in
a period of stagflation. Mr. Price was one of a few managers investing in
growth stocks at the time. Sometime after the conclusion of WWII he became concerned
that the inflationary habit had taken over management of the economy and by
1979 he was disturbed about how the US was doing. He started managing money to
graduate from FDR’s New Deal, implementing a philosophy he called New ERA in a
new fund concerned about government led inflation. In 1979 George Roach became
his assistant, and I believe in 1997 he became the portfolio manager. He later became
President of the firm. George kept with Mr. Prices’ concerns, but he allowed
the rest of the firm to continue with their growth stock orientation, which produced
a very commendable record.
Prior to December 2023
The T. Rowe Price New Era
Fund was managed with extreme consciousness of inflation. This translated into investing
in common stocks of companies expected to rise in the future as inflation rose by
investing in assets, not earnings. Most followers of the New Era fund viewed it
as a commodities fund because that is what the portfolio looked like.
Shinwoo Kim has been the portfolio manager for New Era since 2021 and has
been with T. Rowe since 2009. He has proclaimed that commodities have
been and are in a long bear market ever since he became portfolio manager, but that
changed in December. On the first
of December hea as portfolio manager of New Era affected a considerable change
in its portfolio, returning it to Mr. Prices’ basic concerns.
Kim feels the US has migrated to a world where inflation and excessive
federal government spending is the principal driver of investments. After ten
years he has concluded, and convinced the rest of his investment committee, that
the commodity cycle is about to change. He expects future investments to benefit
from cyclical earnings growth, which will produce better results than ownership
in highly valued assets.
As a natural resource fund New Era has not done
poorly, compounding at +2.97% compared to the average Natural Resources Fund’s
+2.69% over the past ten years. I suspect this outcome was largely the result
of its yield, not earnings or Price/Earnings expansion and/or P/E expansion.
(The result was not measured against the changing value of the dollar.)
Economists have tagged the price of copper as Dr. Copper. As the price of copper has
performed better than most economists over time. The use of copper by the
electrical/electronic industries and construction activity gives its use a
cyclical growth trend. Other structural changes expected to benefit the
portfolio include Uranium and US shale production. The fund believes the long-term
outlook for production in Marcellus/Utica as well as Permian is understated. Additional
attractive areas for investment include industrial gases and pipelines. (This
brings to mind Berkshire Hathaway- a position owned in our personal and managed
accounts)
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Mike
Lipper's Blog: 2 Media Sins Likely to Hurt Investors - Weekly Blog # 820
Mike Lipper's Blog: “SMART MONEY” Acts
Selectively - Weekly Blog # 819
Mike Lipper's Blog: Solo Messaging is
Meaningless - Weekly Blog # 818
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Mike Lipper’s Monday Morning Musings
2 Media Sins Likely to Hurt Investors
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Media Motivations
“Americans Feel More
Optimistic About Economy”
“Feeling Sunnier on
the Economy”
The first headline is
from Saturday’s Wall Street Journal in the “news” section, not the editorial
page. The second is from the Washington Post,
the DC trade press.
First Sin
The WSJ newsroom
pitching to their perceived audience ignores the dichotomy between the “happy
talk “generated by Washington and news of layoffs, closings, and bankruptcies.
(Risks to readers losing jobs and eventually investment money.)
Economic stimulus through
executive order or budget manipulation is used to inflate the economy. It is
structured to buy votes from specific segments of the population. Businesses
are simultaneously laying-off people, closing facilities, and cutting back on
expansion plans. These businesses do not think the future looks good.
My guess is that business
leaders are processing the math something like this. Actual or expected sales
are not growing at all when price increases are deducted. Lay-offs of 3% are largely
replacements for retirees, or for bad hiring decisions. Reductions of 10%+ are an
expression of lower expected demand, or anticipation of unfulfilled expected
improvements in the quality of work. For example, regularly cutting the bottom
10% of people to improve production at all levels. (This has been the annual policy
of Goldman Sachs and others, even before receiving lower overall fees for their
work.)
Since the beginning of
recorded history, we have experienced expansions and contractions, or if you
prefer booms and recessions. The last three administrations have added to
expansions through inflationary spending. Government spending was less than the
private funded expansion, although that is no longer true considering accelerating
deficits. Thus, we are due for a contraction. In some ways the sooner the
better, as it will help reduce the cumulative deficit accumulation. The exact
timing of this contraction is beyond the skill level of most prognosticators. However,
we should be forewarned that this is not what the media is currently doing.
Second Sin
On Friday the S&P
500 Index slightly exceeded its two-year old record. (There was no acknowledgement
in the press concerning the calculation being market capitalization weighted. This
means that the index is weighted and influenced by a minority of the universe. In
other words, by the majority of the money, not the majority of investors. This
distinction favors those trying to raise taxes and political contributions.)
Some believe this is
a sign of a new bull market, as investors have profits in a minority of the S&P
500 stocks. Recent trading provides some perspective. On Friday there were 2918
stocks traded on the NYSE, of which 855 “big board” stocks declined. (More than
the entire S&P 500.) The highest price for the NASDAQ Composite Index was on
November 19th, 2021. So, it is not yet a bull market for NASDAQ
stocks. As of Friday, 4412 NASDAQ stocks traded compared to 2918 on the NYSE.
I consequently do
not consider the market being at a new high, as most stocks are not at a new
high. Furthermore, older market analysts believe a former turning point must be
exceeded by at least 3% to signify a continuing move. To illustrate the
importance of this test. The price hit a high at the end of 1929 and did not
return to that level until September 1954, or about 25 years later. (No warning
from the media and other prognosticators.)
Some Do Pay
Attention to Warnings
In many ways the
game of professional football is similar to professional investing. This week
Jason Kelce, center for the Philadelphia Eagles and the least well-known
football brother, announced his retirement. He is reportedly in good health, although
he is concerned for his young daughters and the rest of his family. His concerns
center around chronic traumatic encephalopathy (CTE), a mental health condition
believed to come from head injuries. CTE is something an all-pro center could
get. Stage 1 of the injury can produce depression, anxiety, and impulsive/aggressive
behavior. (For many years as an investment adviser to the National Football
League and the NFL Players Association who had retired players as trustees, I
have witnessed such behavior.) His retirement probably cost him a few very high
paying years, hopefully in exchange for many more years with his young
daughters. SIMILAR HOPES ARE WISHED FOR INVESTORS OVEREXPOSED TO INVESTMENT
RISKS.
For A Long-Term
Estate Portfolio
One should not focus
primarily on today’s purchase price, but a believed future value that addresses
your heirs’ future needs. Today’s prices represent opportunities to both earn
and lose money. Focus on unpopular securities to reduce the potential size of
losses, and hopefully increase the chance of big returns. Part of the
difficulty in implementing this effort is that it requires someone who is
already skilled in this art form. It requires time and patience to do the
necessary research yourself.
I am willing to incur
the expense of using others for most of the work, including the impact of investor
flows by others. The following list of geographic locations for investment came
from a recent contact with a fund that searches for these types of investments.
The following list is a source for beginning a research effort, not a buy list.
Emerging Markets,
Kazakhstan Telephone, Platinum, Palladian, Potash, South Korea, Uranium,
Copper, Gold, and Chinese Securities (CSI-300 at a 5-year low)
Selection Concept
Passive funds have
attracted more assets than active funds. Many passive funds are required to
keep their portfolios in-line with an index, requiring them to buy when nervous
holders are selling, and sell when their holders are buying. Assuming these
movements come in waves and that many waves are emotionally driven and wrong. Does
this represent a trading opportunity, as excessive trading is not well thought out?
This may particularly be worth a try when only 17% of portfolio managers expect
a hard landing. Another curious opportunity, long-term institutional favorite
Morgan Stanley fell -4.2% and Goldman Sachs rose +0.7% (Both are owned in
personal accounts and GS is in both personal and client portfolios.)
Question: How are you thinking about your investments
for the next year, versus how you’re thinking about your long-term investments?
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Mike Lipper’s Monday Morning Musings
“SMART MONEY” Acts Selectively
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Dull Week with Some
Clues
The stock market from
mid-December through this Friday was flat, except for an early bubble in
January. (I suspect the NASDAQ price surge resulted from the replacement of some
holdings sold for tax purposes in the fourth quarter.) Market analysts suggest a
flat price pattern might represent the smart money either accumulating or
distributing meaningful positions. This suggests prices will either move up
sharply or fall rapidly after a period of time. I will attempt to examine what
I perceive as clues to future major moves.
NYSE and NASDAQ
stocks declined for four of five days in the latest week. The DJIA rose for three
days and the more professionally
followed Dow Jones Transportation Index fell for three days. As a contrarian
measure, analysts watch the latest weekly summary survey published by the
American Association of Individual Investors (AAII). In the latest survey,
participants raised their 6-month bullish prediction to +48.6 % or double their
bearish guess of +24.2%. (Lucky for those who work in the market and those who
live off of it. Individual investors have a good long-term record. From a contrarian
viewpoint following them has value, because they are wrong at critical turning
points.)
The number of
publicly traded companies has been dropping for many years, mostly due to acquisitions,
not failures. In 2023 there were 15,766 IPOs vs 17592 the year before. More
significantly, the money raised dropped to $170 billion from $242 billion.
There are several
thoughtful columnists who occasionally focus on financial history. John Authers
of Bloomberg wrote “America is disinflating…disappointingly slowly.” He
believes a major future expansion would require more problems than are currently
visible. James Mackintosh of the WSJ warns investors that the market goes up
and usually produces satisfactory returns in most 20-year periods. There are a
few times it does not. (It’s important to remind investors that there can be
times when investors won’t be bailed out in a given 20-year period. I wonder if
that is why 30-year bonds and mortgages were created.) I believe he would have
more confidence in recoveries if interest rates were set by the market and not
by government fiat.
One problem with
many economists, both within and outside government, is that they do not have enough
appreciation for lessons learned from Asia and the Middle East. For example, we
don’t seem to appreciate the products and technology that came to the West
along the Silk Road. The following is a list of products or services that
traveled the series of trans-Asian roads:
Silk, Hemp, Cotton,
Wool, Paper (Paper Money). Fireworks (Explosives). Gunpowder, Tea, Horses, and algebra
from India.
Working Conclusions
Recognizing that I
don’t know what the future will bring, I turn to my investment/betting
framework for a relatively conservative perspective. For the time period ended early
2025, I suggest there is a 60% chance of a significant US equity decline. The decline
will perhaps be in the neighborhood of 20%, with an outside 50% chance of a
full depression with an 80% drop. There are also two other possibilities at 20%
each. First, a 5-7-year period of stagflation, and second, a 20% chance of
below 4% GDP growth.
For estate planning
purposes with a 30-year outlook, expect equity returns to be in the 5-9% range.
Your Thoughts?
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Mike Lipper’s Monday Morning Musings
Solo Messaging is Meaningless
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
“The Floor” No Longer Helps
Years ago, on both the New York and London stock exchanges, it was normal
for members to query the assigned market-makers for a supply/demand picture on
a stock they were trading. When the system worked, specialists supplied the
size of supply/demand and their opinion on the next expected price needed to
clear trading levels. This system worked reasonably well until the “upstairs”
trading desks of some member firms began competing for institutional size
orders.
At that point floor specialists believed they no longer had an exclusive
information advantage. Consequently, when approached for a “picture” on a stock,
they were reluctant to reveal any orders left with them. It quickly became
clear from their responses that they were describing their own positions, or
“talking their own book”. This was far less helpful in understanding where the
real market was and the prices necessary to clear nearby trading levels. Over
time, this left the floor to the upstairs trading desks for stocks with
institutional size interests. This led to a situation where those without good
relations with the institutional trading desks were at a disadvantage. Increasingly
they were isolated from the flow of business.
The same thing happened to the distribution of news on the economy, where
the distribution of economic news became increasingly biased. Today’s biases
are so strong that a substantial amount of the current “news” has lost its
usefulness for investment decision making, or should have.
A Small Example with Larger Implications
Friday’s trading was lack-luster. The three most popular stock indices, the
Dow Jones Industrial Average, the Standard &Poor’s 500 Index, and the NASDAQ
Composite, all moved fractionally. The movement was so small that the combined three
movements only totaled 0.34%. The Wall Street Journal ran the headline “Major
Indexes Eked Out a Gain…” (The WSJ is better than its competitors.)
My problem with this is that the Russell 3000 gained the very same 0.34%.
(The Russell 3000 tracks the performance of the 3000 largest stocks, including
those in the DJIA, the S&P 500, and most of the NASDAQ.) The person writing
the headline at the WSJ was giving some comfort to bullish investors and those on the political left.
The Missed Opportunity: The Dichotomy
The WSJ also published articles on three other factoids:
The dichotomy is that while most of the left-leaning media is full of
happy talk about expanding the economy, businesses are cutting back on people,
locations, inventories, and some prices. One might say they are preparing for a
recession, or stagflation. The bulls and bears not talking to each other, which
is not a sound position for making investment decisions.
Stocks to Buy for Different Times
In the WSJ weekly price chart, the
fifth largest gainer was Healthcare. This is a sector heavily owned by
institutions which has not seen many gains. Money-making opportunities look
good considering the increasing amount of healthcare needed to be funded, independent
of the cyclical economy for pharmaceuticals and health related services.
Once the economy bottoms Energy producing corporations will see demand
rise, which should last for several years. One way to play this is through
accounts + personal holdings in Berkshire Hathaway. (BRKA & BRKB will
benefit from a large portfolio of petroleum stocks and ownership of operating
utilities.)
We also serve investors who have multi-generational payments ahead of
them. One of the few ways to play this is through stocks and funds invested in
Africa and the Middle East. One of the classical ways to invest is to buy sectors
under current price pressure. We think the Chinese region is well worth
developing a long-term investment view.
Let’s Learn of Your Views.
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- Weekly Blog # 815
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Mike Lipper’s Monday Morning Musings
Our Wishes & Perspectives
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Wishes
Our wishes are the most basic of all, that you and yours will be happy
and safe in the new year. The safety we wish for includes your physical,
emotional, and financial safety.
Current and future safety are linked as we transition through the number
of future periods. The number of future periods depends on the number of
futures you are concerned about. As we manage money for people and institutions,
we look both at the near and longer-term impacts.
In reading the rest of this blog, don’t focus on whether or not you agree
with our conclusions. Focus instead on the logic that makes it possible for the
conclusions to materialize.
Each of us is perceptively different, as we have diverse elements of responsibilities,
net assets, and personalities. Consequently, each investor should make his/her own
personal decision. I am interested in learning how you reached your decision, as
I contemplate new topics to write about.
Guides to the Future
Every analyst is in some respect a historian. Since we don’t know what
the future will bring, we search the past for clues about what the future holds.
I find the following three quotes useful when thinking about the future.
“History doesn’t repeat itself, but it often rhymes.”
Mark Twain
“Those that fail to learn from history are doomed to repeat it.”
Winston Churchill
“Too often we enjoy the comfort of opinion without the discomfort of
thought.”
John F. Kennedy
Two Thoughts on the meaning of 2023
It was a discordant year, with the equity markets rising on a weighted basis
(measured by market indices). The economy was flat when inflation is taken into
consideration (GDP through November +3.03% and CPI +3.16%. The number of units
sold was flat, with higher prices and margins). Large and smart employers are
laying people off while sales are still satisfactory.
Split Political Structure in 2024
The current Senate and House are run nominally by different political
parties, with a larger than usual number of members announcing their retirements.
This suggests it will be difficult to see many controversial laws passed. The
Supreme Court will likely continue to question the authority of the
administrative government. It will also be difficult to get an expanded
spending package passed. (Even if something gets passed, the US will join most
other governments trying to tap the bond market at reasonable rates, likely crowding
out commercial and municipal needs.)
There is an invasion on the southern border of the US. Is this an
economic “fifth column”? (During the Spanish Civil War, the winning Loyalist
General referred to his group of saboteurs in Madrid as his fifth column.) They
were more important in capturing the capital than the four military columns he
had surrounding it. (The importance of this war should be important to the US, as
the Spanish War supplied new tactics used by the German Army and Airforce in WWII.)
Millions of illegal immigrants have crossed the US border. My guess is that one military division of 20,000
could be persuaded to follow the commands of a known enemy.
The bulls believe the market has begun a new bull market phase, or at
least a continuation with new leadership. Their bet is on a rotation away from
mega-caps to small-caps. Selected small caps stand a better chance than others,
particularly services companies who can help corporations and consumers lower their
costs through the application of technology and selected imports. Some of these
small companies could be attractive acquisition candidates, providing leadership
to tiring large corporations. The math could be described as 5 (large) + 1 (small)
= 6+4 or a combined 6 that becomes 10. The risk to an institutional sized buyer
in the small-cap market is that these stocks are much less liquid than their
normal large-cap investments. Consequently, they must take a much larger
portion of the available stock.
2025-26 Opportunities
To score the winning shot, one must follow Wayne Gretzky’s dictum of not
skating to where the puck is, but to where it will be. I’m suggesting this is how
you should build a portfolio today, as the present occupant of the White House
will either not be there, or a second Mrs. Wilson will be managing a lame-duck
Presidency.
The biggest change will be in Defense spending, a shift from the faulty
diplomacy of sending unimpressive Cabinet members to negotiate unsuccessfully.
We must reverse the quiet disrespect of our outmoded military, symbolized by
the lack of other nations joining our Red Sea patrol efforts. The declining
value of the US dollar is another indication of the perceived lack of respect for
our current leadership. The money for new defense spending will come from curtailing
spending on social tasks and redirecting it to prepare for a fight in a two-front
war. Thus, I suggest selecting investments to accomplish the goal of protecting
the US and our interests.
Let me hear your thoughts.
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Contrarian - Weekly Blog # 814
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© 2008 – 2023
Michael
Lipper, CFA
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rights reserved.
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author for limited redistribution permission.
Mike Lipper’s Monday Morning Musings
Dangers “Smart Money” & Thin
Markets
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Christmas Breaks & Wishes
Like most weekly blog producers, I experienced
an early December dilemma. Should I send out my seasonal best wishes to our
readers and not produce the final December blog, or write it as usual? Not
writing the blog was very tempting, but I then remembered George Washington’s very
first military success in New Jersey. He and relatively small number of
Patriots crossed the Delaware River and attacked the British (German Hessians)
on Christmas Morning at Princeton.
My fear of a similar attack on our
securities markets led to my decision to publish the blog. But to all our
readers, I extend a very deep and heartfelt “Merry Christmas & Happy
Holidays”
What Could Go Wrong?
Late in the betting period there is a sudden surge in
betting on a specific horse for no apparent reason. The chatter in the
grandstand is that it was caused by external bookmakers balancing their betting
exposure on a given horse. The presumption being that the clients of the
bookmakers “knew” something that improved its probabilities. This surge was
labeled “smart money” by those at the track. Sometimes, but not always, the
chosen bet wins.
My fear is what market analysts call
the distribution effect, because they understand what a third Obama White House
doesn’t. That the initial absorber of sudden volume often tries to immediately offload
as much of its liquidity volume on other players as possible. This secondary
distribution can be repeated numerous times, enlarging the impact.
As happened during the last 2 hours on
Wednesday, where all the major US stock indices fell significantly. Some observers
pointed to a large trade, a series of large trades of a highly leveraged
short-term derivative. By the end of the day individual securities were down multiple
percentage points. Early Asian markets fell, but by the end of the trading day losses
were small. On Thursday stocks rallied almost back to Wednesday’s opening and
on Friday there was a slight gain.
This attack, like the one on the
“British forces” at Princeton, did not have a material impact on the war other
than to buoy up Washington’s spirits and please the Congress in Philadelphia.
I have no idea whether there will be
other “smart money” surprises during the remainder of the year, but at least I
am prepared.
Other Inputs Could Be Important
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Upsetting Parallel - Weekly Blog # 813
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Copyright
© 2008 – 2023
Michael
Lipper, CFA
All
rights reserved.
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author for limited redistribution permission.
Mike Lipper’s Monday Morning Musings
Searching For Answers
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Neural Basis for Preferences
In one of the laboratories in the Humanities and Social Sciences Division
of Caltech, a former post-doc led a paper showing a neural basis for making aesthetic
preferences like qualities-contrast, hues, dynamics, and concreteness.
(Kiyohito Iigaya, is now an assistant professor of neurobiology at Columbia
University’s Irving Medical Center.) A similar type of pattern recognition is
what successful investors use in selecting investments, such as relative price,
operating free cash flow generation, management process, investment
sponsorship, competitive position, and future changes in these and other
qualities.
I am a senior trustee at Caltech and a member of the board of Advisors of
CUIMC
Painters, like Picasso, were successful investors in both art and other investments.
However, the tracking of investment qualities is insufficient to produce a
record of continued investment success.
At least two additional qualities need to be tracked.
The eternal job of the investor is to evaluate these and other qualities
relative to each other. There is no precise ranking information on these qualities,
which makes it difficult for quants to use.
It is with this as a background I look at elements each week. The remainder
of this week’s blog is devoted to some of the highlights that guided me in making
multiple investment decisions. I am interested in which factors are important
to you, and whether you disagree with my reactions.
More Information Does Not Appear to Help
More information should reduce the number and magnitude of investment
surprises. But it does not seem to help. The problem could be that the information
is distributed unequally. Those with an information delivery advantage, but
without sufficient capital or ownership, can have limited impact on price gaps.
In accessing the situation, one difficulty may be understanding the veracity of
the information at the moment of discovery. In highly speculative markets and
issues, there are often more false rumors than real, actionable information.
(In terms of the current market information regarding the next interest rate change,
it could be wrong 6 times in a row.)
Banks & Brokers Cut Staff
State Street is the latest company to announce the layoff of 1500
employees. These actions do not instill near-term confidence in investors in the
overall market.
Is Value Investing Essentially a Trade?
The fundamental principle of value investing is the current price being substantially
less than the current or projected future price. In the mind of the investor
this value gap is temporary, because if it is not closed there is no benefit to
the purchase. Value investing is therefore a trading strategy, or a two-step
move. Contrast this with investing for growth, which does not require a
terminal sale except for a change in investor circumstances. This distinction
has a definite impact on the timing of the purchase.
“Happy Talk” Motivation is Critical (Viewpoint)
Years ago, when each town had a thriving local newspaper, its
publisher/CEO was a powerful person locally. Recognizing that elections create
advertising demand; a lot of editorial space was devoted to newsprint. Locally owned papers eventually disappeared
and were replaced by chains, and increasingly by broadcast media. They were the
beneficiaries of centrally controlled advertising revenue. The media provided much
airtime to elections, with the most focus on presidential elections. In many
cases, profits from presidential election-year advertising helped carry them through
the other three years. Because the majority of listeners were lower income,
Democratic Party spending was higher. The owners were conscious of this phenomenon,
and it impacted their actions, with the bulk of the coverage/advertising focusing
on economic “happy talk”. That is why “news” coverage today is more positive,
and often wrong.
Interpreting a Signal Can Be the Opposite
The acquisition of one company by another for stock could signify that
the board of the purchaser believes owning the acquired stock is better than investing
in their own. An interest rate cut by the Fed could also signal a concern about
the direction of the economy, or a shift in the importance of the second
mandate, full employment. In other words, be careful what some wish for.
Personal Tax Rates Are Important
Similar to the selection of art purchases helping make security selections,
foreigners can remind us of the importance of US personal tax rates. Shohei
Ohtani signed a baseball contract with a gross value of $700 million. In the
early part of the ten-year contract, he will be paid just $2 million per year.
(He expects substantial product endorsements and other income during that
period.) He will receive the other $68 million per year, without interest, when
he is 50 years old. (I assume without the burden of US taxes). I wonder if he’s
available as a tax consultant, as he came up with this approach.
“Long-Term” Different Meanings
Reliability is a characteristic many investors look for in their
selection process. In the US, most investment intervals have more gaining than
losing periods. The sizes of the gains are also larger than the majority of the
sizes of the losses.
All markets move in cycles. Thus, a five-year period usually has one
complete cycle and parts of another, if not two. With only 20 quarters or just
5 annual numbers, I find the number of observations too limited. The SEC in its
wisdom requires mutual funds to show year by year results, overall period performance,
and the best and worst quarter. Numbers nerds note that the public is given 12
slices of data. I would prefer to have quarterly data for the life of the fund,
which would be 40 slices for ten years.
The economy has generally grown since the end of WWII, which might not
continue in the future. Consequently, I am much more interested in seeing what
actions, if any, were taken in negative periods. Particularly, what portfolio
holdings were reduced or eliminated and how much that cost the fund in recovery
periods.
There is one medium-sized fund group which indicates it invests for the
long term, which they define as 3-5 years. We would not use this fund for most
taxable investors if over that short a period it replaced almost all its starting
portfolio.
15-Year-Olds Will Rule
At some point the 15-year-olds youths of 2021 will be part of the ruling
class in many, if not most, countries. In 2021, thirty-seven countries took
standardized tests in math, reading, and science. Three countries tested top
three in the three subjects: Canada, Estonia, and Japan. Due in some part to
the pandemic the US dropped 13 ranking spaces in the three tests, or roughly
three-quarters of a year, to finish sixth on an overall basis.
As a grandfather and great-grandfather of 5 young ones, I am
worried about the future we are leaving them. Our current educational system is
the result of a deteriorating educational process that has been in decline for some
time. Recently, a teacher on maternity leave at a “good school” revealed that she
had decided not to return to the public school system. A real-life casualty of the
dysfunctional system she worked under.
What scares me is the US has the most expensive educational and health
systems in the world but does not lead the educational rankings in the world. A
long-term oriented society that prizes excellence is necessary for world
leadership. For the protection of our young people, we must on a long-term
basis increase our exposure to the best minds and culture in the world.
Investment Conclusions
Share Your Thoughts
Do these topics and format make sense for you and how should it be
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Lipper's Blog: Reactions from a Contrarian - Weekly Blog # 814
Mike Lipper's Blog: 3 Senior Lessons +
Upsetting Parallel - Weekly Blog # 813
Mike Lipper's Blog: A Cyclical World +
Consistent Results - Weekly Blog # 812
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Mike Lipper’s Monday Morning Musings
Reactions from a Contrarian
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Surprises Pay More Than Consensus
Consensus, when right, is not highly rewarded. Contrarians are correct
less than consensus suggests but they receive greater rewards. Over time, the
bigger winners start out by being relative loners. With these guidelines, I
review my reactions to media comments. (Remember, my absolute right to be
wrong.)
The Indices are at yearly highs; therefore, we have entered a “bull market.” Not necessarily! In some cases, these are not all-time highs. Additionally, the indices need to be measured in the most valuable currency in order to enter a new market cycle. Trading volumes are also not impressive. We live in a global world with the US dollar declining, so we ought to adjust the peaks and valleys accordingly.
Possibly the best summary of market moves comes from Bank of America,
which describes it as emotionally bullish but intellectually bearish.
When the Fed pivots it will be a seminal event. Possibly, but odds are it will be late. For those predicting a pivot,
they are like football fans calling the pivot wrong six times in a row. They
could be right, but their odds are no better than 50/50.
There are at least three other reasons to question the timing of an interest rate cut.
Current Market Focus Does Not Address Long-Term Problems
Almost all the attention of market participants is focused on short-term
events, which are expected to determine short-term results. Media performance reporting
on minute by minute, day by day, week by week, and year by year results view this
as the only essential reality. These short timeframes are essentially important
to traders, but of little value to long-term investors.
Most money invested in the market is for retirement, or longer. The assumption
ought to be that the average worker probably still has 25 years before
retirement and a somewhat similar period in retirement. Many institutions can
have indefinite lives. Thus, the things that are really important to these investors
are actions impacting the long-term progress of their assets and liabilities.
One of the reasons good analysts and portfolio managers study history is
to get an understanding of market cycles, which are caused by insufficient
supply of goods and services in the minds of consumers and investors, followed by
periods of too much excessive production. These trends take a long to very long
time to evolve. However, their terminal stages often occur swiftly and rarely
reverse.
Three Trends That Hurt Investors
Other Items of Concern
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© 2008 – 2023
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rights reserved.
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author for limited redistribution permission.
Mike Lipper’s Monday Morning Musings
3 Senior Lessons + Upsetting Parallel
In age order Henry Kissinger, Charlie Munger, and Sandra Day O’Connor
died this week. They were remarkable people who lived good lives, leaving numerous
good lessons for life. In general, these lessons can be utilized in our quest
for investment wisdom.
Henry Kissinger was not only a fountain of
geo-political knowledge, he was also a skilled conflict negotiator. Almost
every important investment contract could use his skills in finding areas of
agreement and more clearly defining the goals of both parties. In many
instances these agreements went beyond the headline numbers. This is the
essence of a happy deal and trade.
Charlie Munger, who I have had the pleasure of
knowing for over ten years, was a believer in staying within his circle of
competence. However, he grew this circle when he could. He was intelligently
patient if progress was occurring. He believed in the value of people over
historic financial results, both as customers and workers. (This became
important as the country transitioned to a service economy, even for the
manufacturing companies. Tesla is much more service
oriented than the Big 3, with their own wholly owned dealers doing some
replacement work, but very little repairs)
Sandra Day O’Connor believed in updating decision alternatives
in reaching conclusions. (One of the traditional investment problems is, what
is cheap and what is expensive? For investors this requires viewing prices in
terms of interest rates, the value of the dollar and other currencies, and evaluating
capacity utilization, among other variables.)
Upsetting Parallel
Current experience is the critical investment difference between the
enthusiasm of youth and inexperience. Young and inexperienced investors treat
every event as something new, requiring a new way of dealing with it.
More experienced investors recognize elements that are similar to past
behavior patterns. This suggests that very little is totally new, most circumstances
are somewhat similar to what occurred in past cycles. Kissinger, Munger, and O’Connor
were young in the period leading to the “Depression”. Those of a similar age
are dying out or no longer have views that seem relevant. We have not gone
through a similar period since WWII, which in part was caused by the
Depression.
Our educational institutions do not study this period and consequently most
people know little about it. Unfortunately, political leaders of today also know
little about it. The current occupant of the White House waxed poetic about the
FDR period upon entering the Presidency, not recognizing that many of FDR’s ideas
led to lengthening the Depression, and probably to WWII as well.
Cycles are never absolutely the same, but close enough to raise the
possibility, if not the probability, of similar results reoccurring. I will
attempt to identify some similar events reoccurring today.
Global Economic Growth Slowing Brings Autocrats to Power
World trade has slowed, and populations don’t like it. They look for someone
to blame and politicians are only too eager to provide answers, gathering more
power for themselves in the process. Prior growth has attracted more immigrants,
initially welcomed as low-cost labor. However, their growth in numbers has now become
a burden to the existing society.
Rising levels of crime will bring more policing power and stronger
governments. We are seeing leadership in just about every continent move from
the center to extremes on either the right or the left. Pay particular
attention to Europe, Africa, the Middle East, South Asia, Latin America, and
some elements within the US and Canada.
China Changes and the World Feels it
The rate of China providing goods at low prices to meet demand in the US
and Europe has slowed. The Chinese have cut back on imports, so China’s net
contribution to world trade has declined. Wealthy Chinese had been previously exporting
as much of their prodigious savings as possible. This has led to a change in the
Chinese government’s attitude. They are now trying to attract foreign
investment and are changing a number their rules.
The Chinese are simultaneously pouring resources into their defense
sector. They have more ships than the US Navy and now have 3 aircraft carriers.
They also appear to have state-of-the-art missiles and spacecraft. Like other
countries with large standing militaries, they have little respect for current
US government forces. However, like both Japan and Germany in the 1930s, they are
very conscious of the potential power the US could deploy if it had time to do
so.
Politicians Using Old Strategies in a Changing World
Good prices vs votes/contributions are the key battles. People want goods
and services without regard to where and how prices are generated, as long as they
appear reasonable relative to perceived competitors. Technology generally
lowers prices through increased production and less human labor. Professional
politicians want contributions from labor unions that have negotiated long and
large contracts. The reduction in world trade will eventually make many nations
poorer, including the US.
Target the Lawyers
Charlie Munger performed the switch from law to investment management brilliantly.
Goldman Sachs also has a number of successful investment bankers and other
executives who started with law firms before seeing green. In their defense,
some lead M&A counsels at law firms earn close to investment banker
packages, with their growing personal accounts residing at money management institutions.
Warning: If some of the trends mentioned continue, the parallel with the
Depression is more than likely.
What are you doing to prevent it?
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Lipper's Blog: A Cyclical World + Consistent Results - Weekly Blog # 812
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Mike Lipper’s Blog: How to Find the
Answer – Weekly Blog # 810
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Mike Lipper’s Monday Morning Musings
A Cyclical World + Consistent Results
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
What We Don’t Know
We don’t know the dates and length of the next “bear market", or if it
will “correct” the imbalances causing material problems for society. Similar
questions have been asked throughout recorded history in the Bible, and even before
that.
We have numerous records of rising and falling fortunes for both countries
and individuals. In terms of specific people, we know of births, deaths and
various sicknesses, as well as successes and failures. In a two-dimensional
chart we can see the highs and lows. Unfortunately, we don’t know all the underlying
causes for these end points. These events often occur at unpredictable times
and suggest to me that while we can guess as to the next occurrence, there is
no guarantee our timing will be precisely correct.
This creates a problem in managing client money. Prices move up and down,
reaching end points at different speeds and magnitude. To judge the skill of
investment managers, it is most useful to measure them against as appropriate
index, particularly of reasonably selected competitors. This approach is in
conflict with many owners of investment capital who have obligations to periodically
pay some income/capital to beneficiaries. Consequently, owners without
substantial payment reserves prefer to measure their results in repeatable
calendar periods.
Going Out on a Limb
Based on a casual study of financial history preceding Biblical times, I
am confident we will continue to have investment cycles. Thus, I believe we
will have down markets in the future ahead of us.
Our job as analysts and portfolio managers is to estimate how deep the
next major decline will be, and when it will likely occur. I am reasonably sure
we will have a downturn in the US stock market before the end of 2028. What
I do not know is whether this will be a cyclical bear market for most stocks, or
a more serious correction of major imbalances addressing quality of leadership in
education, the health sector, the military, and government.
(There is some evidence that the coming decline will be cyclical rather
than corrective. History suggests most investors should maintain current
holdings in sound companies, riding through the cyclical decline to benefit
from the bull market that follows. On the other hand, if the decline is going
to address various imbalances, many managements and companies will be
replaced.)
Current News Bits Could Show the Way
Summing
Up
The fact that the 3 popular market indices are all
within 1% of their annual highs on relatively low transaction volume does not generate
excitement. The presently dull Christmas Season is more attuned with global
commercial real estate debt issues and increasing layoffs in the financial
community.
Cash yields of 5% or higher are currently a hurdle to
investing for the longer-term. We appear to be in some form of suspended
animation.
Please share how you see things, particularly if you disagree.
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Lipper's Blog: Recognizing a Professional: Ratings vs Ranking - Weekly Blog #
811
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Lipper's Blog: How to Find the Answer - Weekly Blog # 810
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Lipper's Blog: Preparing - Weekly Blog # 809
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Mike Lipper’s Monday Morning Musings
Recognizing a Professional: Ratings vs Ranking
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
While we can’t know exactly whether someone is schooled in a subject or just pretending, we can presume a lot from their choice of words. In the world of investment statics there are several tribes of analysts that attempt to predict whether a fixed income instrument will go into bankruptcy. They summarize their learned judgements with letter grades, called ratings. These ratings do not give an opinion as to whether they are good investments, just whether they anticipate them entering bankruptcy. The history of the professional credit raters is pretty good, as bankruptcies are relatively few in number. While they give an opinion as to whether the instrument will enter bankruptcy, they do not indicate how much of the issued principle will be lost.
One unfortunate trait of inexperienced people is the use of a term from
one subject in another. While the term may have some similarities, it is not
identical and may not even have the same utility as the original. This is why I
used performance ranks and not ratings when developing the practice of mutual
fund analysis, using the performance array of mutual funds we tracked each week.
This is where my analytical training kicked in.
I pity those who passed through the analytical profession and did not
learn as I did at the racetrack. My experience instilled in me a strong
aversion to losing money. Analysis at the track is similar to the popular method
of selecting investments based on past performance. This approach relies on the
belief in the repeatability of events and has led to the development of quantitative
systems, both in the investment market and at the track. “Quantitative”
investing has periodically been very popular in the investment market,
buttressed by “ratings” which are meant to be predictive.
I gained an advantage from my many
discussions in the grandstands following each race, where some player complained
about the failure of “the system” he/she was following. Because I did not like losing
money, I paid attention to the complaints of the failed “systems”. What I
discovered was these systems actually worked better than half the time for a
period of time, but rarely more than 60-70% of the time.
Later in life I heard similar complaints from more senior analysts as the
corporations they followed failed to deliver the expected performance. The
standard complaint was that someone was lying. It took me a while to connect
the similarity of their complaints with those I heard over the weekend at the
track.
This realization led me to think about the process of predicting the
future. Since no systematic thinking produced winners all the time, there must be
mistakes in the math. As securities analysis is taught as an adjunct to math,
or the certainty of law, the losses had to be a function of mechanical
mathematic failure. It eventually occurred to me that it was not the process that
failed, but the universe of variables being different than those utilized.
At the track, the things that could change were the jockey, the trainer, the
exercise rider, what the horses were fed, what drugs were administered, or the competition.
Each of these possible changes, and others, could and often did impact results.
This is why I believe we should pay more attention to changes of people and
their attitudes in the investment world. More so than believing in their statistical
record.
This week was a good example of changes that largely invalidated the past
record of the entire global financial sector. As an analyst, investor, and
portfolio manager, I have always had an interest in financial services
securities. Stock Exchanges have been at or near the center of the financial
sector and thus were always of interest. There have been five Lipper brokerage
firms that have been members of the New York Stock Exchange. (Never has a son
or younger brother succeeded the founder, and consequently none extended to a second
generation.)
In most commercially viable countries, there are stock exchanges. Considering
all I know about these exchanges; none are making most of their money exchanging
securities. At best, most make single digit returns on this revenue. This week
I attended a capital markets conference of the 300-year-old London Stock
Exchange. While it is interesting looking at their history or past performance,
it is of no value predicting their future.
Unlike racehorses and most people, some companies can be rejuvenated into
something quite different than their past history. In the case of the London
Stock Exchange, it has grown into the London Stock Exchange Group (LSEG),
primarily through a merger with a Thomson Reuters spin-off. (In 1998 Reuters purchased
our fund data business. We and our accounts still own Thomson stock, which has
a major position in LSEG.)
The spinoff included a number of unintegrated number-crunching entities, labeled
Refinitive. It was a comfortable fit because the London Exchange had previously
acquired a number of similar unintegrated and under-marketed numbers-companies.
To this mix they added “expert” management from various financial and tech
companies, including a cooperative agreement with Microsoft based on their
plans and/or dreams.
The CEO believed he had identified all the problems that could delay
them. The current management group is investing heavily in new products and
services, including the marketing of them. It would not be difficult to improve
on the record of its two major founders. LSEG deserves to be ranked highly in
its present efforts. I will leave it to others to predict its future.
This Week’s Signs of Stagflation
Despite the media and others chanting Good News, there is increasing
evidence that smart professionals see an approaching decline in market prices.
Whether we are just in stagflation or entering a significant contraction will
be determined later. However, it is worth noting the S&P 500 Equal
Weighted Index is essentially flat year-to-date.
The following announcements have to do with future revenues. The
companies making these statements are addressing the second of two measures of
their health, their investment performance and the prospect of generating new
business, largely from new customers.
Note From London
At private investment discussions in London during the week, locals were most concerned about the US Presidential election, with differing levels of pessimism. I had two comments.
Share your views with me and let me know what you are watching in terms
of markets and votes.
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Lipper's Blog: How to Find the Answer - Weekly Blog # 810
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Lipper's Blog: Preparing - Weekly Blog # 809
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Guides - Weekly Blog # 808
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Mike Lipper’s Monday Morning Musings
How to Find the Answer
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
First, recognize that one does not have the answer to the problem. In my case, and for most others, I do not know what the future holds for the world, our economy, the “market”, or my accounts and my investments. Second, search for a source of greater knowledge. Taking from the folklore of the racetrack, “smart money”, a guide to an advantaged decision.
The term smart money
comes from the Damon Runyon era, when private bookmakers gave odds and took bets
on horseraces. The odds that they quoted were the odds the bettor received if
they happened to win. This was the traditional way of doing things in Great
Britain and other places. In the US, various state governments saw a way to
generate revenue from betting activities. They required the tracks to pay them
a relatively small portion of the winning bets, alongside what the tracks
themselves charged, for a combined total “take” of around 15% of the winnings.
Illegal bookmakers offered
two services, taking bets over the phone and rather being forced to attend the
track, running a banking operation by extending credit to the bettors. If the
money bet by their customers was differently balanced than the money bet at the
track, the bookies might not have enough customer money to meet the winners’
expected payments. To reduce this risk, the bookies evaluated their exposure late
in the 30 minutes before each race. They then communicated to a trackside
associate to bet enough money on the probable winner to reduce the likely
payoff odds to an amount they could afford. The minute this balancing operation
was activated, it became visible on the tote boards. Some would recognize what
was happening and choose to join the so-called “smart money”. Riding on someone
else’s thoughts sometimes pays off.
Applying the Smart
Money Approach
Each week I scan
both the volume of shares and how they are divided between rising or falling on
the NYSE and NASDAQ. I pay particular attention to any meaningful difference
between the two major marketplaces.
The media proclaimed
this past week a rising market because the three major stock market indices
rose. However, there were more shares sold at declining prices than at rising prices.
The New York Stock Exchange gets more media attention than the NASDAQ because
the dollar value of shares listed is larger than that on the NASDAQ. However,
some of the volume on the NYSE is not as professionally managed as that on the NASDAQ
market. (The NYSE has more individual investors and more institutions with
smaller and less competent research staff). In the latest week, 70% of the NYSE
declined vs 64% on the NASDAQ.
The smaller decline
is likely due to more growth-oriented stocks trading on the NASDAQ. Also, the
big market-cap energy companies trade on the “big board”. (In the week ended Thursday,
mutual funds primarily invested in natural resources fell -5.62%, while growth
stock funds gained +2.69% on average.
Accumulation or
Distribution
Another attempt to
find “Smart Money” is technical, market, or price analysis. The theory is that
smart money acquires (buys) investments when they are cheap and distributes (sells)
them when they are overpriced. Few investors openly declare what they are
doing.
Many market
participants can be labeled as either optimistic or pessimistic. For the most
part optimists believe many of the problems facing us will be addressed
successfully in the near-term, usually in under one year. They are buying because
in part they believe that near-term earnings will rise. The pessimists don’t
have confidence in the near-term, they believe there is still near-term risk at
current stock price levels.
If one quickly
divides most stocks into growth and value, there were two new elements revealed
this week. The weekly report on US rail (freight) traffic fell 1.7% on a year
over year basis. Seven out of ten types of freight declined for the week, with only
three rising. Visits to various shops show that many items are no longer being carried. Smaller in terms of direct economic impact
but psychologically more important is Apple’s (*) announcement that they are
raising trade-in prices for old devices, including Androids. They are doing
this to aid sales of their own phones, while perhaps supplying the overseas market
with cheaper phones, particularly India.
*Owned and managed and personal accounts
Lessons from History
There are many
lessons from the Depression we continue today, such as the almost guaranteed death
and debts of WWII. As a Marine I am very aware that the best and perhaps only
way to achieve long-lasting peace is to prepare for war, which we are not.
A second lesson from
someone who is older than the two leading candidates for the US Presidency is
that their ages should not be the main reasons to approve their second chances.
Their history as young and not so young men is enough to disqualify them. More
important is that our political system allows them to be candidates which we should
correct. There are many senior people older than the two “young seniors”, like Charlie
Munger who could do a better job.
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Mike
Lipper's Blog: Preparing - Weekly Blog # 809
Mike
Lipper's Blog: Indicators as Future Guides - Weekly Blog # 808
Mike
Lipper's Blog: Changing Steps - Weekly Blog # 807
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Mike Lipper’s Monday Morning Musings
Preparing
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Little did we know that nursery tales were preparing us to be sound
investors. Remember the story of the three little pigs who all built homes, but
only one survived the storms because he took the time to build with bricks.
Later, we grew up and found ourselves in a marching unit alert for the preparatory
command, immediately prior to an execution order. We should always have been
searching for preparatory signals to avoid major losses and unexpected gains.
Last week we warned that sudden rallies are usual in “bear markets”. Only time will tell if we have entered a bear market and if we should identify the following as preparatory signals. (What is your opinion?)
Preparing Oneself
Marcus Ashworth is a brilliant columnist, which means that I agree with
him. He wrote “Probably the most underrated skill in finance is knowing when to
sell”. It may be wise to first identify what to sell. I suggest the first step
is to identify each holding in terms of purpose, as either speculation or
investment. The main difference between the two is whether your bet is based
mainly on the belief that the price will rise. Or alternatively that earnings will
grow, new products/strategies will be launched, new leadership will be in place,
or there will be a closing or a collapse of principal competitor.
The next step is to find or create an appropriate peer group. (This is
easier for mutual funds.) Then, in the shortest reasonable time-period, arrange
the peer group into quintiles. (Caution, avoid dividing the peer group into
quarters or halves.) If the peer group you are studying is a narrow-based
specialty, your best bet is to be in the top or bottom quintile. If it is in
the bottom quintile you are betting on the changing character of your
investment making it a winner. These types of securities normally do best for brief
periods.
I follow a different approach for diversified equity holdings. My approach
is less volatile than the general market and spends most of the time in the
second or third quintile. It is rarely in either of the extreme performance
quintiles. These placements are appropriate for long-term holdings with
periodic payments to beneficiaries and has the benefit of keeping clients happy
and maintaining relationships.
When to Sell
The biggest risk for many long-term investors is impatience, which was
noted by Blaise Pascal in the 1600s. He said, “All of humanity’s problems stem
from man’s inability to sit quietly in a room alone.” This sitting approach works
better with large portfolios of high-quality stocks, because over time the
gains will be greater than the losses, particularly during inflationary periods.
We are quite possibly not in such a period. Charlie Munger recently
commented that during Berkshire Hathaway’s (*) first four decades of Warren Buffet’s
ownership history it was relatively easy to pick sound investments. In looking
at the company’s 3rd quarter report there were a considerable number
of subsidiaries whose earnings were disappointing, but the success of their
larger positions more than made up for those that declined. (They have built up
a very sizeable cash reserve in anticipation of finding good future homes for
their acquisitions.)
* Owned in managed or personal accounts
Outlook(s)
The longer-term outlook is quite attractive, with IBES estimating S&P
500 earnings per share reaching $276.02 in 2025 compared to $218.09 in 2022.
The current concern about corralling the rate of inflation does not seem to be an
issue with 30-year US Treasury paper yielding 4.75%, not much different from
the 10-year rate of 4.56% and the 2-year rate of 4.83%. (I suspect that there
is considerable amount of leveraged buying of 2-year compared to the 30-year,
which is one of the reasons shorter rates are higher.)
However, the reason for discussing multiple outlooks is the shorter-term future looks more troubled than the longer. If one treats the period since the beginning of COVID-19 as a single unit, we have been going through stagflation with volatility. One of the reasons the stock market has done as well as it has is due to an increase in leverage, both operational and financial. Revenues have been going up marginally, but reported and adjusted earnings have risen by a multiple of sales. This resulted from an increase in private debt and other forms of debt extensions driven primarily by large caps. (In the latest week, declines represented 1% of the companies traded on the NYSE vs 23% on the NASDAQ). I previously alluded to the number of middle size companies owned by Berkshire not doing as well as in the past.
There were contradictory indicators delivered this week. On Saturday the
WSJ reported that 90% of the weekly prices of securities indices, commodities,
currencies, etc., were up. The sample survey of the American Association of
Individual Investors (AAII) had 50.3% bearish over the next 6 months vs. 24.3% that
were bullish. The bearish reading is not only twice the bullish, but entered an
extreme reading and was much larger than it has been over the last couple of
weeks. (It is possible that the sample skewed differently this week or
participants reacted to the news.)
My Operating
Conclusions Remain the Same
Some trouble ahead,
with better markets in 2025.
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Mike
Lipper's Blog: Indicators as Future Guides - Weekly Blog # 808
Mike
Lipper's Blog: Changing Steps - Weekly Blog # 807
Mike
Lipper's Blog: Change Expected - Weekly Blog # 806
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Mike Lipper’s Monday Morning Musings
Indicators as Future Guides
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Since before humans began recording history, they looked to the past to predict the future, believing the Powers (God or Gods) would repeat. This belief was fortified by the introduction of numbers which repeated. Thus, as numbers were collected to create past performance records, humans arranged them into groups of indicators to predict the future.
The problem with this approach is that we treated the collected numbers as indictive of the future. Numbers that are an incomplete historic record are an abstraction of the events. Missing from the scores are two critical elements.
Despite these drawbacks we enshrine indicators as the proximate causes of
people’s actions. This is particularly true in using historical actions to
settle contemporaneous actions in legal disputes, e.g. The Prudent Person rule.
(Commercially, I am happy with the reliance on past data, for it
encouraged the desirability of past mutual fund performance, fee, and expense
data. However, my stack of losing racetrack tickets demonstrates that the past
is not the absolute prolog for the future.)
Nevertheless, in the absence of “divining rods” indicators are useful
devices in looking for future guidance, or for a good crutch. To reduce my reliance on placing too much
importance on my investment thinking, I examen numerous indicators, and where
possible what else was happening at the time, trying to ascertain motivation.
From my handicapping experience, I am aware that popular choices pay off less
than choices that are less popular.
The following, in no specific order, are some indicators I look at each
week and my reactions to them.
Transaction Volume Location
This week on the NYSE, 77% of traded shares declined, with only 59% declining
on the NASDAQ. (I believe there is currently more transaction volume by both
the public and less experienced managers on the NYSE. Note, NASDAQ prices
gained more this year and thus have more to give back if we are in a general
decline.)
Corporate Announcements
Korn Ferry*, a major employee sourcing firm announced that it was
dismissing 8% of its work force. (If their corporate clients were planning to
hire soon, they wouldn’t be letting people go. ADP* also forecast a decline in customer’s payrolls, which hurt
their stock. Additionally, UPS predicted lower shipment volume coming from
China, suggesting retail merchants are cutting back.
(* Owned in personal or managed accounts, not recommended.)
Congressional Indicators
A split Congress is expected to last at least through the next election. With
very little legislation enacted, Democrat inflationary actions and Republican
deficit cuts are unlikely to materialize.
Future Investment Performance
Double digit equity performance is not normal, and triple digit performance
is even less so. The better performing ten-year university records are in the high
single digits. 12% of American taxpayers had a net worth of over $1 million net,
with the bulk of their assets in securities and their homes. Current private equity
and debt investing is on average producing low single digit returns. Private investments
are showing signs of aging, relying on raising new money from the public and newly
managed accounts that were formally paid commissions. New and less experienced
managers are entering the business.
Current Prices
The weekend WSJ publishes the price moves of securities indices,
currencies, commodities, and ETFs. I track the % up vs. down to get an overall
feel for the 72 investments. This past week only a 1/3rd were up. Of
interest were the top/bottom two, Nymex Natural Gas +9.14% and Lean Hogs +6.75%
vs. -6.29% for the S&P 500 Communications and -6.19% for the Dow Jones
Transportation. (This suggests to me that these extreme prices are the result of
sudden news items. With 3 of the 4 extremes in the +/- 6% range, it suggests this
is a normal move for surprises.
Working Conclusions
Share your thinking with us.
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Mike
Lipper's Blog: Changing Steps - Weekly Blog # 807
Mike
Lipper's Blog: Change Expected - Weekly Blog # 806
Mike
Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805
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Mike Lipper’s Monday Morning Musings
Changing Steps
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Reason for Cycles
Throughout human and geological/climatic history one can detect repeated
periods of similar, but not identical elements. These periods are often immediately
opposite prior cycles. Humans tend to be coin flippers. On the one side is
greed and on the other is fear. Both are motivated by a desire for qualities we
don’t have in sufficient quantities, the assurance of safety from others. The
longer we suffer from the perceived deficit, the greater the perceived need.
In the natural world dominant forces are eventually met by counter forces,
which brings them back to some form of equilibrium. Both written and geological
history record frequent but irregular cycles. History records the existence of
cycles, but not the motivations that created them. Literature about historic
events tries to fill this gap, although it is disadvantaged by those hoping to
curry favor with the winners and their write ups.
Futurists
Many people are content to take one day at a time and not focus on the
future. Those of us responsible for doing something today for future
beneficiaries recognize that we will be judged by the conditions that exist when
beneficiaries get “their” assets. We are thus cursed by future perceptions of how
we deal with investments today.
Where Are We?
Many of us have traveled with children or other impatient people who
repeatedly ask, where are we? Or worse, when will we get there? In truth, we
don’t know. It is the same in dealing with investors, or worse, their “gatekeepers.”
Tell The Truth
Most of the time in traveling through the investment cycle we don’t know
where we are going or when the cycle will end. My approach is to share my
current thinking, including identifying many things that I don’t know. I always
try to look for clues that could possibly identify a change in direction. I risk will be wrong some of the time before I
recognize my mistakes. I believe we are in the early stages of an important
change in the behavior of this cycle.
The Beginning of a Cyclical Change
(I hope my clients and beneficiaries forgive me for not getting the right
decisions quickly enough.)
Evidence List
Shopping List of Potentials
A number of well-known, former leading companies have new managements who
have shifted their focus from building returns for shareholders to instituting policies
that appeal to socially oriented institutions. This is particularly true for
financial service companies, a sector likely to see more concentration. It is
probably too soon to buy them, as they are likely to have a few more periods of
less than good earnings ahead of them. These companies will either shrink to unimportance
or will be better served by new management and owners.
Currently, most small companies are valued at half or less than large
companies in terms of P/E or Price/Book value. These small companies are often better
managed and more focused on investment returns. They could be the source of
critical people and the attitudes needed for a turnaround.
Question: Are you looking for turnarounds?
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Mike
Lipper's Blog: Change Expected - Weekly Blog # 806
Mike
Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805
Mike Lipper's Blog: Prepare to be
Bullish, Long-Term - Weekly Blog # 804
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Mike Lipper’s Monday Morning Musings
Change Expected
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
Unusual Items
Most Logical Changes Expected
For some time, the mutual fund performance rank order has not varied
much. Using the latest week through Wednesday and 5-year performance. Ranked by
5-year performance:
---Performance---
Latest
Week 5-Year
Large-Cap Growth +2.75% +11.67%
Multi-Cap Growth +2.40% +9.19%
Medium-Cap Growth +1.52% +7.30%
Small-Cap
Growth +0.15% +5.11%
International +2.28% +3.57%
Global +2.00% +2.62%
Point of View
Believing that we live in an irregular, cyclical world, I expect the
domestic rank order to be reversed in some future market period. One reason is the
current effort of the FTC to reduce M&A activity of large companies
acquiring smaller companies in horizontal deals, which I expect to fail. I anticipate
an increase in M&A activity in the financial services sector, which includes
banks, fund management companies, investment advisers, and fintech operations. Highly
effective salespeople will be greatly valued, as will critical tech people.
There will be cross-border and cross-industry mergers.
Did you miss my blog last week? Click
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Mike
Lipper's Blog: Stock Markets Move on Expectations - Weekly Blog # 805
Mike Lipper's Blog: Prepare to be
Bullish, Long-Term - Weekly Blog # 804
Mike Lipper's Blog: Selling: Art &
Risks, Current & Later - Weekly Blog # 803
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Mike Lipper’s Monday Morning Musings
Stock Markets Move on Expectations
Commodities Move on Transactions
Most Economics Relate to Needs
Politics Rotate on Vote Guesses
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Variables
These are among the more
significant variables that investors and the rest of society juggle in reaching
investment decisions. Most investors focus their attention on only a few
variables. Some use just one, like price charts or reported earnings.
Perhaps my lack of
confidence in understanding the complete details of variables drives me to look
for correlations, which is why I ponder many variables. This tends to result in
the creation of diversified portfolios of funds and individual securities. Because
my clients and I invest to meet a number of different needs, our investments
are focused on several time periods.
With these thoughts as
guidelines, I’ll share a number of factors I am concerned about that leave me
worried. I expect the future to include numerous changes, with some coming as
surprises. My portfolios are likely to be fully invested, with a willingness to
shift elements when I become more convinced of the wisdom of future actions.
The tragedy in Israel is too
new to take into proper perspective. Thus, I am excluding it from this blog, but
not from my mind.
List of Worries (Not in rank order)
Critical Questions:
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Mike
Lipper's Blog: Prepare to be Bullish, Long-Term - Weekly Blog # 804
Mike Lipper's Blog: Selling: Art &
Risks, Current & Later - Weekly Blog # 803
Mike Lipper's Blog: Investment Thinking
During a Lull - Weekly Blog # 802
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Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 – 2023
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All rights reserved.
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limited redistribution permission.