For Better Performance: Pick the Right Data - Weekly Blog # 960
Mike Lipper’s Monday Morning Musings
For Better Performance: Pick the Right Data
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Kevin Warsh Right in the Beginning
One of the first substantive moves made by the new Chairman
of the Federal Reserve Board was recognizing that the Fed has historically focused
on the wrong data to predict the future movement of interest rates. Our
fraternity of market followers and predictors (analysts and portfolio managers)
have enshrined various indices as guideposts to the future. Unfortunately, both
the Fed and “The Street” have used the same or similar indices, which largely rely
on Federal Government produced data. Chairman Warsh recognized these indices were
not particularly useful and feels it’s time to consider adding other data
points, both for the Fed and “The Street”.
For probably three generations, the amount of money devoted
to the gathering of economic activity has been declining on an inflation
adjusted basis. The decline was accelerated by the current administration through
the brief Doge period by paying a premium for retirement in various agencies.
Much of the data was gathered by low-income people in various companies, which led
to late filings and inaccuracies.
What Would Be Better
Since the beginning of time market followers have looked at
what people bought in the way of goods & services and how they invested their
money. Many of these approaches are still useful today to get a feel for the
temperature of supply and demand and to see how investments and savings are
taking place. I find this approach useful in determining the probability of future price movements.
These Are the Items I am Following
- What are companies currently doing that is uncharacteristic
of what they did in the past. In the latest edition of Barron’s there is a
brief article on three stocks we own for ourselves and clients: Berkshire
Hathaway, Apple, and Walmart. (These are not recommendations, which should only
be made with an understanding of the investor’s knowledge, experience, other
securities held, and perceived needs.) Each of these companies is doing something
new for them. Berkshire Hathaway is growing a collection of companies building housing
communities at different price levels. Services provided by this collection of
companies includes mortgage generation, real estate brokerage, and possibly a supplier
of public utilities. (They have not announced an overall plan, but it is
interesting that they are putting together this effort at a time when the
housing market is depressed.)
- Apple’s new CEO is likely to produce new products &
services, akin to what Steve Jobs did. While these new items may share some of
the characteristics of existing products, they are likely to open new markets
for Apple.
- Walmart is exploring the use of its communication
relationship with grocery customers through paid advertising. Grocery customers
are Walmart’s largest source of sales and this could lead to the largest and
possibly its most profitable electronic advertising network.
Not all these new ventures will work, but the analytical key
is examining the radically new ventures smart companies are undertaking.
- The bond market in terms of timing is ahead of the stock
market. Most of this year the volatility of bonds has been greater than stocks.
The bond market is structured around credit conditions and the central
government is theoretically deemed to be the best credit. This is true most of
the time as judged by those outside of its control, with its price relative to
other currencies fluctuating on perceived inflation rate concerns. The US
dollar has declined in purchasing power due to inflation, as have most foreign
currencies. One measure of purchasing power is the price of gold, which in our
lifetime has risen from its fixed price of $35 an ounce to today’s level of
$4320.50. (Remember, prices can go up as well down. On January 1st, 1980 gold sold
for $850 an ounce and by June 1982 it had fallen to $300.) Gold is nevertheless
a good indicator of what the market believes the future price will be. For the 5
years ended last Thursday, the average gold fund gained +25.29% per annum compared
to +17.52% for the average global natural resource fund and +10.37% for the
average commodities’ fund. (If inflation drops to 2% or lower, the price of
gold would be expected to drop materially). This could happen sooner than the market
expects considering 61% of the 72 weekly prices The Wall Street Journal reports
were down for the week.
- Chicken dinners are growing and beef meals are dropping at
restaurants from McDonalds to high-priced dining locations. Furthermore, the number of people in
restaurants are declining, while some are closing.
- Investors sense that change is underway. In one collection
of equity accounts investments have fallen by 3.5% since early September, while
news from Washington remains positive. Psycho analysts tell us that people feel
losses twice as much as they do gains. With me it is more like 3+%.
- We are seeing the number of people working in the financial
community shrinking, and not all of it is due to “AI”.
Chairman Warsh Commented
Warsh awaits the reports from his five investigative committees
due by year-end. He has noted that instead of the Fed paying attention to
annual data, he sees change in periods as short as 3 months influencing future
actions.
As usual I seek your comments so I can learn.
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Mike
Lipper's Blog: Are We Refighting the American Revolution? - Weekly Blog # 959
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Lipper's Blog: Are We in Normal or Historic Times? - Weekly Blog # 957
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Are We Refighting the American Revolution? - Weekly Blog # 959
Mike Lipper’s Monday Morning Musings
Are We Refighting the American Revolution?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
People Unhappy with Both Major Parties
We act like very young children who protest when denied some
little thing. Children, feeling denial is a retraction of parental or family
love, then act out to express their hurt and confusion. These little children
have matured into us, who express our hurt and confusion by communicating our perceived
problems to the identified powers that be, political parties. We are no
different than the brave people who came to a new land to fulfill their needs, feeling
disappointed with the powerful people in the “old world” who withheld some old
benefits they perceived they had.
The Issues Faced by American Settlers Are the Same We Face
Today
Unhappy people have existed in many countries since recorded
time, trying new government approaches to solve their unhappiness. Ancient
Greece, Rome, and various city-states tried different approaches, but none lasted
long.
The American Experiment
We were remarkably lucky that some of our leaders attended European
Colleges or were readers of history. They knew of past failures to create governments
that had hoped to produce long-term happy people. Unlike earlier attempts,
leadership in the thirteen colonies were of different religions and
backgrounds. Under British rule all mail had to go to England before it was delivered
next door or to other colonies. Consequently, there was not a singular American
thought pattern. This is why it took American leaders over twelve years from
the Declaration of Independence to develop the US Constitution, and more importantly
the Bill of Rights.
What Made the US Different is Not Totally Accepted by All Today
While we recognize the presence of the majority, our
Constitution recognizes the existence of the minority, or multiple minorities who
require their rights to be protected so they cannot be eliminated. The
Constitution assumes and to some degree applauds a change in leadership, which increases
the probability that legislation will be both a product of the majority and
minority points of view. It is up to Congress to pass legislation. The Supreme Court
and lower Courts determine if legislation is authorized under existing law and
the Constitution. The President is elected to preside over the government, not
function as an all-powerful commanding executive.
What Are Signs of Unhappiness?
For the last couple of weeks more stocks were sold at
declining prices than bought at higher prices. (Investors only accept lower
prices when they are displeased with their holdings.) In the current week, 70%
of New York Stock Exchange (NYSE) listed stocks declined vs 60% of NASDAQ
stocks. In the latest weekly sample survey of the American Association of
Individual Investors (AAII), 53.3% were bearish for the next six months vs just
28.8% bullish. Using the average year-to-date investment performance of mutual
fund sectors, Commodity funds were +26.78%, World Equity funds +13.26%, and US
Diversified Equity funds +11.00%. (Clearly showing domestic inflation has investors
worried.)
Both US Courts and many Foreign Governments are unhappy with
the current administration. We will see this coming week if attendance at the
United Nations meeting in New York is lower than expected. Also, this week, Chairman
Xi meets with President Trump. Will that change other countries’ attitudes
toward the US?
What are Your Thoughts?
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Mike
Lipper's Blog: Survival First, Before Growth - Weekly Blog # 958
Mike
Lipper's Blog: Are We in Normal or Historic Times? - Weekly Blog # 957
Mike
Lipper's Blog: Is the Volatility of Data in Hiding? - Weekly Blog # 956
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Survival First, Before Growth - Weekly Blog # 958
Mike Lipper’s Monday Morning Musings
Survival First, Before Growth
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Historic Lessons
The increase in current money is mostly generated by
enthusiastic people who are likely to have difficulty surveying basic lessons
from the cyclical world. The trick is to know which horse you are riding. Very
few investors can seamlessly at once move from one horse to another without being
on uncertain ground at times. That is why I recommend a working transition plan
that starts with building a buying reserve capable of fluctuating in response to
your view of your own situation and the price levels of specific securities.
Where Are We Now?
I don’t know, but we seem to be much further along in the
development of the enthusiasm fueling rising markets. During the shortened
Labor Day week, more stocks were sold than bought during the first three trading
days. On Friday, we had a relief rally following a four-week period of small
declines. Using equity mutual funds as a useful indicator, at least 85% of mutual
fund sector averages fell through Thursday. There were only 15 sector averages that
showed gains. Six sectors rose over 5% during the four-week period: Energy
Commodities +12.80%, Agricultural Commodities +9.43%, General Commodities
+8.67%, Latin American Stocks +7.82%, Precious Metals +7.54%, and Managed
Futures Alternatives +5.04%. (As a group they gained from investors nervous
about currencies, including the US Dollar.)
Nevertheless, there was still more enthusiasm on the NASDAQ than
there was on the NYSE last week, which had 26% of its stocks rising compared to
22% on the Big Board. There was a similar patten for New Highs, with 4.1% on
the NASDAQ vs 3.7% on the NYSE. (Clearly, there are a greater number of “AI”
related stocks listed on the junior exchange.)
Building a Buying Reserve
Every investor likes the securities they hold, but unlike our
children, grandchildren, and great grandchildren, we can and should rank the
relative attractiveness of what we own. A position which has not recently risen
should be questioned, particularly if it is selling below the price paid by a
long-term corporate buyer. In terms of the rest, put what you own on a list to gradually
reduce by at least 30% and up to 50%. This is particularly true if you expect to
gain 10% or less over the next year from today’s price.
What To Do with the Reserve Cash?
Today, unless you are a skilled fixed income trader, do not
own any bonds longer than 2 years in maturity. Remember, the purpose of the
reserve is to give you buying power when the opportunity is right. It is
probable the sale of the fixed income buying reserve will lead to a small
acceptable loss when you sell to free up cash to buy future big winning opportunities.
Until the general market breaks, if any new name added does
not rise within the first nine months of ownership it should be sold. You can
use the tax loss to reduce the taxes you incur by selling some winnings to add
to your reserve. (You can repurchase the name 31 days later if there is a new
reason to buy it.)
Please let me know if you like this approach so I can
learn.
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Mike
Lipper's Blog: Are We in Normal or Historic Times? - Weekly Blog # 957
Mike
Lipper's Blog: Is the Volatility of Data in Hiding? - Weekly Blog # 956
Mike
Lipper's Blog: Fears On a Quiet Summer Weekend - Weekly Blog # 955
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Are We in Normal or Historic Times? - Weekly Blog # 957
Mike Lipper’s Monday Morning Musings
Are We in Normal or Historic Times?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
The Single Most Critical Job
In thinking about the investment future, the critical job is
guessing what the near future will be like compared to the past. Is the next
period going to be like the last five or ten years, or possibly the downfall of
the leading country of the world?
In trying to ponder ways of thinking about the future, it
starts with an admission that I don’t know what the investment future will be.
The second admission is acknowledging that I do not know what global changes
will occur that have not existed in the world. For example, the discovery of
the new world, the harnessing of electricity, and developments in the medical
world. However, a study of human history and some understanding of geology can
be useful.
Everyone has their own way of thinking about relevant
financial behavior, whose models often parallel most others. I have devoted an
adult lifetime to the analysis of the investment performance of mutual funds,
with emphasis on those offered for sale in the US. These funds were used by a
large portion of the American investment public and were something of a model
for investors from other countries.
The US Experience
The largest portion of mutual fund money is invested in
8,162 US Diversified Equity Funds, with total assets of $20.7 trillion dollars.
This group excludes narrowly focused specialty equity funds, overseas funds, fixed
income funds, and commodities funds. Over the last five and ten years through
last Thursday, the average investment performance including reinvested capital
distributions was a gain of +8.26% and +11.09% respectively. These periods
included relatively mild recessions and no depressions or global wars. Looking at
longer periods, these results were better than average.
These results repeated over long periods have met the
retirement needs of individuals and institutions for capital investments. They
delivered good results which hopefully will continue, although I doubt it.
Historical Long-Term Lessons
President Trump will soon meet with Chairman Xi again. The
last time they met Xi asked, “Can China and the US overcome the Thucydides trap
expressed by the ancient historian and general Thucydides?” The Thucydides trap
is the point at which financial and military costs exceed the productive
capacity of the domestic economy, which is what led to the fall of the richer
Athens over Sparta.
Is the US Approaching the Trap?
The Federal debt has reached $40 Trillion, with two war
efforts by the US. This weekend Russia recognized its problem by entertaining into
high level negotiations with US officials to resolve some unclear proposals for
peace in their war with Ukraine. Both Russia and China are supporting this
expensive battle, as is the US.
The current US debt expansion is causing European and other
countries to reduce their ownership of US dollars. This weekend, Norway is
reducing its holding of dollars by $17 billion. The dollar is slowly losing
value relative to UK Pound Sterling and the Euro. In addition, private US debt
is increasing through private debt channels. (When retail investors are enticed
to buy investments that are new to them, it has not led to an extended period
of gains.)
Investment Advice
While there are some positive signs, it would be wise to be
careful. An important size buying reserve could be useful.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Is the Volatility of Data in Hiding? - Weekly Blog # 956
Mike
Lipper's Blog: Fears On a Quiet Summer Weekend - Weekly Blog # 955
Mike
Lipper's Blog: What Could Go Wrong? - Weekly Blog # 954
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Is the Volatility of Data in Hiding? - Weekly Blog # 956
Mike Lipper’s Monday Morning Musings
Is the Volatility of Data in Hiding?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Looking at the Unhelpful Data?
When stock market followers looked at stock price volatility
during the summer they saw relatively low volatility. Thus, they think not much
is going to happen that will cause prices to gyrate. As is often the case, they
are possibly looking at significant changes in several fluctuations.
Below is a list of potential change agents that occurred this
week:
- Changing national strategic alliances
- Over half of US stocks fell this week
- AAII sample more negative
- Iran’s plans
- Savings rates in US and China
- 3 vs 12 months
Strategic Alliances
Countries and societies are changing alliances, impacting their
level of support in the future. This weekend, Iceland will vote on whether they
should re-engage with Europe and be less reliant on the US. Similar feelings
are being expressed in numerous countries, which are trying to determine the
price of dependence on the US. The armaments business is likely to grow.
Over Half of US Stocks Declined
Fifty four percent of NYSE listed stocks and 58% of NASDAQ stocks
fell this week. Only 5% of NYSE stocks and 13% of NASDAQ stocks hit a new high this
week, with the NASDAQ reaching its highest price for the year. From an
employment viewpoint this raises some questions. The American Association of
Individual Investors (AAII) survey showed only 32.9% of participants being bullish
for the next six months vs 35.5% bullish the prior week.
Iran’s Plans
Apparently, the Iranian leadership believe that they are
winning the war and are using the low level of fighting to expand domestic
counter- intelligence. (I wonder if this suggests an increase in secret subversive
activity in the US and other countries?)
Imbalance of US and Chinese Savings Plans
According to Greg Ip in Saturday’s WSJ, the US level of
savings is insufficient and is causing us to rely on increased debt levels. In
China however there is too much savings, which keeps the amount of debt down
and creates a problem of low import prices for many western countries. These
trends reversing would be good for US companies already selling into China,
like Apple*. (* Held in personal and client accounts)
3 vs. 12 Months
Fortune Magazine’s newest contributor is George Calhoun, an
entrepreneur turned professor who also serves on board committees at the
Stevens Institute of Technology, where I also serve. He raised the question of the
Federal Reserve relying too much on 12-month numbers (produced by the
government) vs 3-month numbers, or shorter. The markets react much faster than
in even the shorter period. (I believe the new Chairman of the Fed has a
somewhat similar view)
As usual, I would like to hear from you so I can learn.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Fears On a Quiet Summer Weekend - Weekly Blog # 955
Mike
Lipper's Blog: What Could Go Wrong? - Weekly Blog # 954
Mike
Lipper's Blog: Are History & Economics Books Closed? - Weekly Blog # 953
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