Changing Steps - Weekly Blog # 807

 

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

1. Lowest number of sales of previously owned homes since 2011.
2. Yields on 30-year Treasuries have broken above 5%.
3. Change in Leading Indicators, -9.67% for last 12 months.
4. Private Equity and Credits are struggling to find new clients, including the public, which is usually a sign of increased risk.
5. Fixed income-oriented funds have lost money for 3 years, some for 5 years. Funds invested in alternatives, value, and small company growth, are also struggling to perform.
6. If October stock and equity fund performance ends with a decline, the major averages will have declined for 3 months. The equally weighted S&P 500 Index has fallen this year.
7. It is possible the average stock may finish down for the year, completing a 3-year period of stagflation.
8. At current or higher interest rates, money previously invested in stocks may get invested in bonds, both by the public and by pension/retirement funds.
9. We are seeing signs of deflation in that sales discounts are showing up. Some may conclude President Biden is repeating FDR’s mistakes, which won’t end well and may possibly include a war.

 

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?

 

 

 

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

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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