Is History Rhyming Again? - Weekly Blog # 934
Mike Lipper’s Monday Morning Musings
Is History Rhyming Again?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Preface
Before the New Jersey Symphony’s inspirational playing of
Beethoven’s Pastoral Symphony there was a brief concert by the New Jersey
Symphony Youth Orchestra’s Academy Orchestra, who are gifted and wonderful. However,
what was more wonderful was thinking that these talented young people not only
learned their musical skills very well but also learned a bit of the history
and discipline of classical music. Hopefully, it will give them the skills to
manage the messed-up world we are passing on to them.
I couldn’t help my own burdened brain sitting there Friday
night after what may have been the most important stock market week in some
time. The Standard & Poor’s 500 pierced the low set in September. Classically
trained market analysts will likely suggest how difficult it will be for this
most important of all indicators to quickly recover the 10% loss from its high
point. Pundits will likely blame the current military and diplomatic failures
to end the war.
Those in leadership positions are not paying attention to
ancient history. Iran is the modern name of what was called Persia for
centuries. The rulers of Persia controlled much of what passed through the
“silk road”, which not only passed new foods to the western world but also
mathematics, science, paper money, and gun powder. Persia had a large and
powerful army that kept would be conquerors away, although it was not
particularly successful at adding to its piece of the Asian land mass.
I believe the main threat to the US and other countries is
not their incipient nuclear warfare, but their successful sponsorship of proxies
who damage other established governments and societies through the destruction of
people and property. Recently, the US experienced a couple of wanton killings carried
out by US citizens who received local training and support. We have seen the
Iranians do this not only here, but in the UK, Europe, Middle East, and Africa.
Because their sleeper cells easily entered the US through an open border, we
don’t exactly know the size and capability of the problem.
The US has a history of winning wars and losing the peace
because we are not very good as occupiers. Also, it is worth pointing out that
Iran has never successfully been occupied by foreigners. In my opinion, the
dream of a fully formed new government structure for the country appears naïve.
In exposing the problems which led to the market drop, we
need to address an approximately 100-year period of excessive debt creation and
the confusion between a top-down education and a bottom-up learning process.
This Week & Beyond
We got one violent rally this past week and could get one or
more this coming week because a gap opened between the S&P 500 and NASDAQ on
Friday. The gap must normally be filled before a sustained move can occur. Friday
can perhaps be summed up in three numbers:
- S&P 500 -1.67%
- Price of oil +7.07%
- ECRI industrial prices rallied again to the 130 level, putting
the year-over-year gain at +9.25%
In the first three days of the week there was a positive
tone to US stock prices, but they were swamped with declines in the last two
days, putting the SWX down for five straight weeks and on Friday it fell below
its September returns.
The declines appeared to be coming from retail-oriented
accounts, many of which were housed at large retail brokerage firms years ago. Coincidentally,
both the number of listed stocks and the number of primary retail brokerage
firms significantly declined during this period. They were replaced by larger
more diversified firms whose brokers switched from commissions to fees, making them
look more like “wealth managers”. However, many of them are still short-term
oriented and prefer stock exchange listed securities for their accounts. Most
of these new recruits to the business have not experienced a full economic
recession and very few investors or investment committee members have any
direct experience with depressions.
The latter point, in my opinion, is causing great risk to
the market, not that I can estimate the starting date of a new depression. However,
as someone who has studied old races and other ancient track conditions, I am
conscious that bad things do happen. Thus, I feel a need when examining
investment possibilities to include an alternative negative future in reviewing
future strategies. There are not many investors or advisers who do.
Most down markets, but not all, are caused by a forced
repayment of debt at an inappropriate time, like in William Shakespeare’s “The
Merchant of Venice”, or in margin calls. We may be due for such a period!!
Coming out of the expansion of most global economies after WWI in the nineteen
twenties, there was a ballooning of debt creation. Borrowing against securities
became popular with retail investors in the US and other countries, particularly
by those of the farm community in the US. By the late 1920s, many US farmers,
merchants, suppliers, and local small banks were heavily in debt, with their
crops and land used as collateral. When the price for domestic crops was impacted
by lower-priced foreign competition, it led to dire conditions. They appealed
to their congressmen for help in putting tariffs on incoming food items and they
convinced a reluctant President to enact The Smoot-Hawley tariffs, causing foreign
governments to respond in kind. This led to the disruption of global trade,
which was one of the initial causes of the recession. The recession was turned
into a depression by a new government which needed a ten-year long depression
and a new World War to pull us out of this self-administered trouble. I AM NOT
PREDICTING THIS, BUT I AM SAYING WE SHOULD CONSIDER IT A REAL POSSIBILITY.
Caution: As these worries are disturbing, they should not be
discarded, even though none of us wish they come to be. However, prudence
requires that they should be examined regularly to see ensure their chance of
occurring stays small and doesn’t creep up to a higher probability. The odds still
favor expansion.
Please share your views which can help us.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Bifocal Analysis: Short & Long-Term - Weekly Blog # 933
Mike
Lipper's Blog: This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932
Mike
Lipper's Blog: Premature: Buying Program to Begin Soon? - Weekly Blog # 931
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Bifocal Analysis: Short & Long-Term - Weekly Blog # 933
Mike Lipper’s Monday Morning Musings
Bifocal Analysis: Short & Long-Term
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Short-Term
The data is so negative that brief and violent rallies are to
be expected. Net stock selling has consistently outpaced buying for each of the
last four weeks. For example, 85% of the NYSE stocks and 81% of NASDAQ stocks fell
in the latest week. As Barron’s noted “cash is looking more appealing since
stock market hedges, bonds, and gold are no longer working.” Employers are
barely replacing the more expensive retiring labor in most manufacturing
functions.
There is a new player in the game, private credit. For the
most part issuers of private credit instruments don’t qualify for bank loans,
and they don’t have long credit histories either. Much of this paper is held in
new funds, which are being sold to retail channels. When one of these loans
gets in trouble it is referred to as a “cockroach”. Jaime Dimon, the CEO of JP
Morgan Chase (*) warned that where there is one “cockroach” there is likely to
be more.
(*) JPM shares are owned in managed accounts.
Market analysts are concerned that the S&P 500 Index has
been locked in a narrow 300-point band for the last four months, with optimists
and pessimist exchanging positions. This week, the lower boundary line was
briefly pierced. If the “500” drops 3% more, then the 400-point range will
become a difficult region for the market to rise beyond for quite a period. This
fear may briefly spark some rallies from the derivative and short players.
Longer-Term Implications of History
One purpose of recorded history is to explain what happened,
at least in the eyes of the winning survivors. The survivors, or their
intellectual heirs, construct rules as to why certain actions are repeated. If
there are enough repetitions the rules become dictum, even though the battle conditions
are different. We are taught from a very early age to follow rules without an
understanding of the conditions that created them. This blind acceptance of
rules has led to occasional great mistakes in politics, the military, sports,
families, business, and of course investing. Historic labels often become shorthand
for rules. For instance: Adam and Eve, George Washington, the NY Yankees,
Democrats, Republicans, Chopin, etc.
As has been noted before, I learned basic analysis at the NY
racetracks. One great lesson from racing lore was Man of War, which had 25
winning races in a row but lost his last race to an unknown horse named Upstart.
Proving unexpected things can and occasionally do happen. My self-appointed
task at the track was to guess the chance of the unexpected happening.
Applying the racetrack experience to investing I looked at
the historical record of Warren Buffett and Charlie Munger for stocks and
companies in which to invest. In an oversimplification there were at least
three characteristics the winners had in common, the nature of customers, the
characteristics of the workforce, and the discipline of integrity. (I suspect
the last was penned by his long-term counsel and director Ron Olson, a fellow
ex-trustee of Caltech.)
If the US stock market does decline materially in the period
ahead, I will try to apply the track lessons learned. Charlie Munger taught
Warren Buffett it was better to buy a good company at a reasonable price and not
wait for a cheap price. For many years there were great companies we didn’t own
because they were selling way above a reasonable price. I expect a number of
these “beauties” will be available at reasonable prices during the next
depression.
Next Depression
I
don’t know when it will happen but based on human nature, I expect it to happen.
The US has had only four Presidents that were restructurers: Andrew Jackson,
Teddy Roosevelt, FDR, and Trump. Below are some parallels to the 1930-1942
depression:
- Each
challenged the constitution and fought with the courts
- Weakened
the controls on the banks
- Set the stage for war
- Weakened the currency
- Encouraged the retail public to invest in speculative
vehicles
- Changed
how the US was governed
- All Presidents, except Andrew Jackson, were involved with Japan
No historical comparison is identical, and the future may be
different than the past, but odds favor a closer similarity.
Please share your views, there is much to learn.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932
Mike
Lipper's Blog: Premature: Buying Program to Begin Soon? - Weekly Blog # 931
Mike
Lipper's Blog: Expectations Changing? - Weekly Blog # 930
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A. Michael Lipper, CFA
All rights reserved.
Contact author for limited redistribution permission. 
This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932
Mike Lipper’s Monday Morning Musings
This week’s Dichotomy/Bifocals Needed
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
1 week = 1 month, or 1 or more years
From this investor’s viewpoint, the previous five trading
days could be seen as a great dichotomy. Seventy seven percent of NYSE stock
prices declined and 66% of NASDAQ stocks. Additionally, the US dollar rose in
price to 100.362 on Friday from 97.70 on Thursday!!
The stock price decline was supported by a sharply increased
bearish reading in the American Association of Individual Investors (AAII) sample
survey looking 6-months ahead, which rose to 46.4% from 35.5% the prior week. There
was only a slight fall in the bullish six-month prediction which fell to 31.9%
from 33.1% the prior week. Large publicly traded companies continued to report
little to no hiring to offset those retiring.
One might have thought that worries about inflation would have
had more impact, with the ECRI industrial price indicator rising to 130.99% from
126% the prior week. The index was up 9.59% for the last 12 months, but that didn’t
seem to retard the jump in the dollar on Friday.
If one listened to the advocates of The President, the move in
Friday’s dollar pointed to good times ahead. Other factors they mentioned were
part of the reason the majority sold stocks this week, including on the last
day of the week. We therefore have a dichotomy, which is a condition that can’t
last or perhaps requires a different analysis?
The correct analysis is a condition that possibly occurs to
seniors. That is the need to get corrective eyewear (glasses or implants). Perhaps
we need to use one set of lenses for short distances and one for long or perhaps
use bifocals.
We could be drawing close to the time when we will know
whether the short-term optimistic view or the longer-term more pessimistic view
followed by optimism is correct.
Watch the S&P 500
There are four major US stock market indices quoted in the
press. The Dow Jones Industrial Average (DJIA) consists of just 30 stocks weighted
by their stock prices, whereast he Standard & Poor’s 500 is weighted by market
capitalization. The NASDAQ Composite is also capitalization weighted of about 500
stocks, although some stocks don’t have public records for five and ten years. The
Russell 2000 Index is small-cap focused and suffers from a significant number
of companies reporting losses. For analytical and investment purposes, most
large financial institutions use the S&P 500 Index.
The S&P 500 Index closed at 6,632 on Friday, the lowest price
in over four months. Market analysts believe a further decline of more than 3%
will make a near-term market rise above its former high of 7,002 difficult for
an extended period. The reason for this is, many of the investors who bought
stocks before the decline will try to breakeven on the way up, making progress
slow.
Question: What do you think?
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Premature: Buying Program to Begin Soon? - Weekly Blog # 931
Mike
Lipper's Blog: Expectations Changing? - Weekly Blog # 930
Mike
Lipper's Blog: Diversification - Weekly Blog # 929
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A. Michael Lipper, CFA
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Premature: Buying Program to Begin Soon? - Weekly Blog # 931
Mike Lipper’s Monday Morning Musings
Premature: Buying Program to Begin Soon?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Basic Investment Principle
Investment opportunities are cyclical in both timing and
magnitude. Larger gains are achieved after periods of extended declines. Since
one does not know the extent of a decline or magnitude, it is wise to use a
buying program. For instance, invest no more than 10% of buying reserves at any
time. (This assumes you establish a buying reserve in rising markets. Charlie
Munger has taught us to buy good companies at fair prices rather than always
look for “cheap” prices.
Recently, my sister-in-law sent me a copy of a letter from
my grandfather to my late brother sometime after he left the Marine Corps to
begin his life in the investment business in the mid-1950s. My grandfather, who
built his own brokerage firm for more than thirty years, cautioned my brother to
always expect periodic recessions and less frequent depressions. He also
advised him to not invest against the US, as the country was rich in natural
resources. (This is still good advice, but there are times when our government makes
our currency risky for a period.)
Where are We?
Most investors in defining where we are, do so by looking at
where we have come from. The pundits wax poetic about recent data
extrapolations, expecting the past to be repeated. My analytical training at
the New York racetracks and as a US Marines Corp Officer was to always examine
the current situation and expect some change.
Today, many pundits and politicians see an improving
picture. As a student of financial history, I am conscious that it has been some
time since the last recession. Furthermore, it has been 97 years since the Wall
Street crash and the 12-year depression. Few people recognize any similarity between
that time and our current condition.
Trading Alerts-Correction, Recession, or Depression?
The following are a number of alerts from last week suggesting
we are entering a period of more declines than increases:
- Morgan Stanley is planning to cut 3% of its customer-facing workers.
- 73% of stocks traded down on the NYSE and 67% on the NASDAQ.
A pattern which has been going on for several weeks.
- The ECRI industrial price index rose to 126%, a 4.73% gain
year over year. Clearly, the war in the mid-east is inflationary. 85% of prices
tracked by the Wall Street Journal each weekend declined, echoing the ECRI
results
- Individual investors and those serving retail investors are
not confident in their outlook for the next 6 months. 33.1% are bullish and
35.5% bearish.
- The S&P 500 index is the best indicator of the market
for both institutional investors and wealthy investors. Along with most other
indices, the S&P 500 index fell on Friday. If this was the beginning of a
recession and the index were to decline to where its rise began, it would drop
28%. If this was the beginning of a relatively mild depression, the drop could
be 49%.
Advice to Buy Program Buyers
I have found it extremely difficult to buy at the exact
bottom, as most declines don’t appear convincing enough. The advantage of using
a buy program strategy instead of a one-shot purchase is that you will likely
have a collection of winners and losers before the overall market has reached
back to its original starting point, assuming you buy 10% each month or quarter.
However, that is not the point of the exercise. You should want to hold your
position until it has reached the condition of a great company at too high a
price, where some trimming makes sense.
Please share your thoughts with us.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Expectations Changing? - Weekly Blog # 930
Mike
Lipper's Blog: Diversification - Weekly Blog # 929 Mike Lipper's Blog: To Win Long-Term, Learn From Great Presidents - Weekly Blog # 928
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permission
Expectations Changing? - Weekly Blog # 930
Mike Lipper’s Monday Morning Musings
Expectations Changing?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
The Main Motivator They Don’t Teach
Fear is the main motivator they don’t teach you about in pre-kindergarten
through Ph. D studies. Primarily, this list is comprised of what can go wrong
and what will hurt you, such as going broke, losing a job, or being defrauded. Discussions
are informative but not particularly action oriented. What would be useful is a
list of expectations, and of prime importance how to recognize them and what to
do. These are life lessons which we all need but are not taught.
Each of us has our own level of awareness of critical
expectations and we are aware of the changes in them. While all aspects of
human life are open to change, I am going to focus on the expectations which impact
our investment realities. These expectations are easier because they deal in
large part with numbers. Numbers, like prices or earnings per share, are
precise but mean different things to different people at different times.
The difficult part of dealing with expectations is identifying
when they change and by how much. For example, a stock price expectation
between $103 and $98, or an earnings per share expectation between $0.67 and $0.70.
The critical issue is how early, or late investor expectations begin to evolve compared
to others. Being early or late is often more impactful than being right or
wrong?
Are We Changing Expectations?
A recent January survey of institutional investors had 50%
expecting stock prices to rise, 39% expecting prices to be stable and 10% expecting
prices to fall. An American Association of Individual Investors (AAII) six-month
sample survey of investor expectations found 33.2% bullish and 32.9% bearish.
Three weeks ago, both groups were about equally sure at 38%.
For the week ended Friday, more stocks fell on the NYSE and
NASDAQ than rose (NYSE 56% and NASDAQ 53%, respectively). Normally slow-moving
industrial commodity prices rose to123.06% from 121.92% the week before.
Most important of all, the US and Israel bombed Iran on
Friday night. (The timing of the attack was a surprise to most, although the US
has been building up its military and Naval forces in the Middle East
recently.)
For some time, large companies in the US have not replaced
retiring workers with new hires. We will see in the coming week if there is a
large change in market expectations and whether that change in expectations is
long-lasting.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Diversification - Weekly Blog # 929
Mike
Lipper's Blog: To Win Long-Term, Learn From Great Presidents - Weekly Blog #
928
Mike Lipper's Blog: Strategically, Time to Think Differently - Weekly Blog # 927
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