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.
Did you miss my blog last week? Click here to read.
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
Did someone forward you this blog?
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A. Michael Lipper, CFA
All rights reserved.
Contact author for limited redistribution permission. 
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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A. Michael Lipper, CFA
All rights reserved.
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Fears On a Quiet Summer Weekend - Weekly Blog # 955
Mike Lipper’s Monday Morning Musings
Fears On a Quiet Summer Weekend
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Is Disruption Ahead?
A quick late August trip to London to attend a great Proms concert
by the Academy of St. Martens in the Fields in London seemed like a good idea to
us earlier in the year, as not much happens in late August. As is often the
case, I was proven wrong when a few worries raised their scary head this week.
Potentially the Biggest Problem
The self-appointed job of this blog is not to precisely
predict the future, but to consider issues that may happen which few investment
professionals are focused on. My concern for the repayment of debt in a rising
interest rate environment is rising. Among my concerns are the sharply increased
funding of data centers, wars in Iran and Ukraine, and the budding desire for retail
investors to provide funding for new private ventures, both on earth and in
space.
I do not know the level of care and consideration the corps of
young financial bankers and their associates are performing, nor the experience
of the investors they are interacting with. What concerns me is that few players
have experienced a significant recession, and only a tiny fraction of the
buyers of this paper have any knowledge of a depression. Morgan Housel states in
his book Psychology of Money, “some lessons have to be experienced before
understanding”. Few people appreciate the possibility of some loans not being repaid
with interest on time when due. While I don’t know the conditions of every loan
made by individuals, companies and governments, I do know that higher interest
rates make it more difficult. On Thursday, Guggenheim Partners’ $1.2 Billion loan
traded at $0.78 vs $0.96 the week before. (Price declines happen when the
market recognizes that repayment of the loan on a current basis becomes
questionable. How many other loans will be similar? I remember this kind of
paper eventually selling substantially below $0.50 in a brief discussion of bankrupt
investments in Professor Dodd’s class in the 1950’s. Graham & Dodd are well
known for writing Security Analysis in 1934, one of the most respected
investment books ever published.) The ECRI Industrial Price Index rose to 142.74
this week from 141.60 a week earlier. Considering the Index has risen 25.93% on
a year over year basis, one would expect to see more distressed loans.)
This week, the Secretary of the Treasury more than doubled the
purchase of 10-30-year US Treasury bonds on offer in reaction to the 30-year
yield rising significantly above 5%. Some have already said that Bessent is
putting a Band-Aid over a bullet hole. After declining following the Bessent
intervention, rates have risen again. Increased rates are likely to make
borrowing more difficult or expensive for the data centers, mortgages, and
individuals. Prior to this announcement, the American Association of Individual
Investors (AAII) sample survey raised its six-month estimate by 0.8% and its bullish
projection by 2.0%. Their bearish projection is now 4.5% higher than their projected
bullish guess.
Some Other Quotes from Morgan Housel
- Nothing is as good or
bad as it seems
- Earth has on multiple
occasions been covered with water. (Geology is a good history teacher)
- Snow White made up for 400 losing cartoons.
- No one makes good decisions all the time.
- Wealth is what is left after taxes and expenses you don't see.
- Wealth is accumulated after spending.
What do You think?
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: What Could Go Wrong? - Weekly Blog # 954
Mike
Lipper's Blog: Are History & Economics Books Closed? - Weekly Blog # 953
Mike
Lipper's Blog: Dead Cat Bounce > Last Chance - Weekly Blog # 952
Did someone forward you this blog?
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What Could Go Wrong? - Weekly Blog # 954
Mike Lipper’s Monday Morning Musings
What Could Go Wrong?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
To Predict is to Accept the Risk of Being Wrong
I read “The Psychology of Money” by Morgan House, which an
investment friend suggested I read. The book suggests that the first task is to
properly understand that most people view the future through the lens of their
personal experiences in their early years. I try to broaden out my early
experience of being born in the middle of the depression to a subsequently
divorced working mother. Additionally, I’ve spent a great amount of time
reading the history of many countries and cultures.
My view of the future is also influenced by my enjoyable
time at New York racetracks, where I tried to end most days with more money
than I started with. In essence, that meant comparing the posted odds versus
the probabilities of winning, or at least coming in second, which has its own
pool of bets that pay off separately. To accomplish that goal, I needed to guess
what could go wrong for each of the horses in the race. I had to accept that
the payoff was reduced by the track taking a portion of the winnings, along
with various taxes and other expenses. The track-payoff was therefore less
generous than the mathematical odds presented.
Nevertheless, there was the occasional opportunity to leave the track with more
money than when I arrived.
Using this approach, along with what I learned from both teachers
and other students at Columbia University, I developed an understanding of the
chance of specific future outcomes for various investments. The first thing I
learned was to eliminate most securities, most of the time. (This was like Warren
Buffett’s three sorting boxes of yes, no, and too difficult.) The formation of
my investment philosophy evolved from these experiences, allowing me to earn more
profits over time than losses taken.
Next Major Downslide
A study of financial history, and geology through the study
of rocks, reminds me that we are always subject to up and down cycles, which come
at irregular times. Since the earliest time humans have attempted to find a
reason for the cycles, either through supernatural causes, the elements Gods,
or men.
I begin with the view that the up and down slices of cycles
are in part a reaction to past opposite extremes, as well as new elements. We
are facing both today. The most frequent human reaction is the funding of
expansions. Initially, expansions are paid for by the reinvestment of past
profits, either by savers or revenue generators. Downslopes are often caused by
the unexpected requirement to pay back loans, like the type described in William
Shakespeare’s “Merchant of Venice”, which may have been a comment on Tudor
spending.
My analysis suggests that the growth of debt is a general
precursor to a depression. We may be in such a phase now, considering the
combination of recognized and unrecognized government debt and the growth of
private debt supplied by retail investors. This may be the reason the 30-year US Government Debt auction
reached a level this week not seen since 2001. It may also suggest that foreign
investors need higher rates to accept an increasingly unpopular government.
Typically, an event brings these types of worries forward.
Perhaps something like this week’s announcement of the quick sale of the Los
Angeles Lakers to cover other financial problems. Broader and more distressing
to me is T. Rowe Price’s statement that it will take a couple of years to stem
the net redemptions of their passive fixed income funds. The final sad note is an
IBES projection that the net income of the S&P 500 will only rise by 0.3% a
year from now at the end of the second quarter of 2027, before rising 17.3% the
following quarter.
Since we are approaching 90 years since the last depression,
the odds maker in me thinks the odds of another Depression is increasing.
What do you think?
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Are History & Economics Books Closed? - Weekly Blog # 953
Mike
Lipper's Blog: Dead Cat Bounce > Last Chance - Weekly Blog # 952
Mike
Lipper's Blog: Long-Term Money Via Telescope, Not Microscope - Weekly Blog #
951
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