Mike Lipper’s Monday Morning Musings Is it Always Brains over Flexible Policy in Investing? Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 – Two questions: - Why don’t smart people always make money with their investment ...

 

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Is it Always Brains over Flexible Policy in Investing? - Weekly Blog # 612



Mike Lipper’s Monday Morning Musings

Is it Always Brains over Flexible Policy in Investing?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –



Two questions:
  1. Why don’t smart people always make money with their investment responsibilities?
  2. When is the time to fix a leak in the roof, when it’s sunny or when it starts to rain?
The answer to the second question is obvious, when it is sunny. Why then do so many smart people fail to adjust their investment portfolios when the market is fairly, if not fully priced? Could it be that selecting good investments is emotionally more rewarding than focusing on policies that could direct future movements within the portfolio?

None of us knows for sure what the future will bring in the periods ahead. A characteristic most of us share in the developed world is the necessity to compete. We measure our results against perceived peers, or in their absence against artificial indicators that were not necessarily designed to replicate our real-world tasks.

For most investors, their responsibility is to convert the assets they manage into a series of known and unknown payments for various future periods e.g. paying bills. In order to accomplish this, they must make some difficult guesses as to the size of the bills due. Whether they like it or not they should be thinking in terms of investment survival. However, they also need to grow capital in the account to pay more bills than would be possible with current assets. This introduces a difficult and unknown risk/reward equation.

Far too many investors focus on competing with peers or indices and not on the risk/reward equation. Some professional investors also add career risk into the calculation. If they fail to please the owners of the capital, they risk losing the client and account or jobs. Unfortunately, most owners of capital and many investment executives don’t know how to evaluate their managers, except statistically or by comparison. I know of one very successful sector analyst that kept his fund from investing in it. His timing was excellent and when that sector collapsed, he was rewarded with a partnership. He eventually became the managing partner of a successful fund management firm. Charlie Munger and Warren Buffett have often said that individual investors can make better investment decisions than many institutional managers because they are not facing career risks.

Now we come to that leaky roof. The best time to fix the roof is when it is not raining or snowing. On Friday the three main US stock market indices reached a new high, as they have many times over the last three years. Stocks go up in price because more buyers than sellers believe the future will be better. They may currently be correct, but at some point in the future they won’t be. There is an old saying from the floor of the Stock Exchange that bulls and bears make money, but pigs get slaughtered. (Maybe they will be shipped to China where there is a pork shortage.)

Will the US market continue to go up? I hope so. However, in thinking about leaks in the roof I’m seeing some dark clouds that might carry rain. While the world will need more goods and services in the future, they might be in short supply at current prices. Because of geo-political fears in the US and much of Europe, the capital expenditures necessary to build additional capacity has been slim. Another capacity constraint is the working age population, which is already declining due to the falling birth rate. (It is possible that Southeast Asia and Africa will be the source of additional physical and human capacity, which is why we’ve invested some capital there.)

Should we be paying so much attention to geo-political events? I recently saw a study that looked at 21 such events, from Pearl Harbor through the killing of the Iranian general. Only 4 sent the S&P 500 Index down 10% (which is normally called a correction). Pearl Harbor was the worst both in terms of the 19.8% decline and the 307 calendar-day recovery. The average historic decline of 5% is interesting because it falls within the 3%-7% collection of 2020 institutional expectations for the S&P 500 Index. With the indices at a record high, the general’s death did not appear to affect the market. For long-term investing, JP Morgan believes you should be guided by long-term trends and not events.

What clouds are we seeing other than long-term capacity constraints? Conditions are becoming more speculative, with the NASDAQ continuing to lead the other markets. The growth of alternative styles and different trading instruments is also a concern. Furthermore, we are seeing many “conservative” institutions shift from 60% in equities and 40% in fixed income to 70/30 allocations. In the first two weeks of the year we have seen growth and tech-oriented funds gain over 4%, which translates to approximately doubling over a year if continued.

Another unsound extrapolation is that over $40 billion went into bond-like funds during the first 16 days.  This extrapolates to annual rate of $1 trillion. We are already seeing intermediate interest rates moving up. Intellectually, I suggested that it would make sense to short the 30-year US Treasury. (The trend of universities issuing 100-year bonds is spreading overseas. Caltech has now done it 3 times and I believe Cambridge is considering it too. With the average US government debt maturity under 10 years and the UK’s under 14 years, we would like to see a lengthening of maturities.) With gains in many cases over 10%, 2019 was an outstanding year for bond holders. I suspect it will not be wise to own bonds for quite awhile.

Sir Isaac Newton is an example of someone considered to be among the smartest of people. He was a young Cambridge Professor who first conceived the three laws of motion and in so doing formed the basic principals of modern of Physics. He was so respected that he was knighted, very unusual for a scientist. He became the master of the Mint, a high honor. At that time in England the government had not yet set aside money to pay its debts, so they created a lottery. The lottery involved the newly formed South Sea Company, which had dubious prospects, but the potential odds were attractive. Sir Isaac recognized the fallacy of the issue and sold his shares. However, he got seduced by the skyrocketing prices and went back in. He is thought to have lost his investment, which may have been 22,000 pounds in 1722. After the Bubble popped, he was quoted as saying “I can calculate the movement of the stars, but not the madness of men.” Clearly a very bright person who made a big investment mistake.

Subscribers, please help me and yourselves from getting sucked into the concluding whirlpool when the current enthusiasm subsides.



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2020/01/architectural-sway-points-and-current.html

https://mikelipper.blogspot.com/2020/01/how-much-will-markets-decline-10-25-or.html

https://mikelipper.blogspot.com/2019/12/repeat-past-history-probable-or-just.html



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A. Michael Lipper, CFA

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Architectural Sway Points and Current US Stock Market - Weekly Blog # 611



Mike Lipper’s Monday Morning Musings


Architectural Sway Points and Current US Stock Market


Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –



Most of the time very tall buildings and highly valued stock prices don’t fall, but history shows that it is smart to worry about the possibility of it happening.

Buildings that are over 100 floors are largely a U.S. phenomenon. During the early days of New York’s World Trade Center, I was asked to join a luncheon club on the top floor of one of the towers. In the ride up to the club the elevator noticeably swayed. Upon arriving at the top, I could see for many miles out of the windows. I watched planes flying up the Hudson River that were below where I was standing. When pressed to join the club I commented that international clients were important to me and my business. I felt that these clients would be nervous due to the lateral movements of the elevator and the thought that they were above planes in flight. I was told not to worry as the lateral movements in the elevators would be dampened, and they were.  As the planes could clearly see the World Trade Center Towers, they wouldn’t fly too close. The increase in wind velocity from ground level to the 100th floor was anticipated by the architects, who allowed the building to sway in order to absorb the energy of the winds.

Unfortunately, as with many assurances, they did not address all risks that could befall those in the higher floors of the WTC. I had neglected to consider the landlord being the Port Authority. As its own governing body, the Port Authority did not need to abide by the stricter rules of the New York Fire Department regarding the width of the stair wells and some other fire precautions. Nor did I contemplate Boeing developing commercial aircraft capable of carrying more fuel than other airliners. Most importantly, I did not consider those planes being used as guided missiles. Nor did anyone else.

This is not the first time a structure tilted measurably. The leaning Tower of Pisa has become a teaching site in terms of soil movement, foundations, and architecture. We are now assured that tall buildings constructed after the tragedy of 9/11 will have a far lower death count and will probably remain upright.

Can we compare the attack on tall buildings and their ultimate collapse to the current US stock market? I clearly don’t know, but the life-altering experience of 9/11 causes me to wonder. Which assurances given will be proven to be somewhat faulty due to unexpected changes in conditions? As a professional investor for others, I feel compelled to consider the fall from high stock prices.

Being a numbers guy and learning from the great educational institution of the racetrack, the first thing I do is look at the long-term odds. From 1928 through 2019 there have been 92 years of data. Breaking the data into performance slices, the 30% gain for the S&P 500 Index in 2019 ranks in the top 21% for all periods. To expect similar results for 2020, or any subsequent year, is like betting on favorites at the track. It is generally not consistently a rewarding approach.

For the last decade S&P 500 Index Funds have grown at a 12.98% annualized rate. Mutual funds that did well during this period were growth oriented and had substantial investments in technology and consumer services. The worst performing funds were invested in natural resources. These trends appear to be continuing in 2020. Through Thursday, 13 of the top 25 mutual funds for the week were growth focused and 6 were technology oriented.

One of the lessons learned from the track is that good near-term performance brings more money, a bet on the continuation of the trend. At the track, the weight of money lowers the pay-off odds, which must be split among more bettors. In the investment races popularity attracts competition, as well as more scrutiny from governments and others who seek to share in the gains of investors.

One way to avoid some of the risks inherent in today’s large-cap growth stocks and funds is to re-examine small-caps and emerging markets. You could also examine a group like natural resources which has not had positive performance for a decade, with a particular focus on energy.

Question for the week: If you made a list of your fundamental investment beliefs and were forced to rank them, which of your top five could prove to be harmful due to changing of conditions?



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2020/01/how-much-will-markets-decline-10-25-or.html

https://mikelipper.blogspot.com/2019/12/repeat-past-history-probable-or-just.html

https://mikelipper.blogspot.com/2019/12/mike-lippers-monday-morning-musings.html



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To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2019
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.

 

How Much Will Markets Decline: 10%, 25%, or 50%? - Weekly Blog # 610



Mike Lipper’s Monday Morning Musings

How Much Will Markets Decline: 10%, 25%, or 50%?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –



The next unknown is no longer a question, securities markets will decline. Some are now focusing on signs that most securities markets are showing an increased potential for decline. I therefore turn to an even more difficult question of how big the decline will be. Based on history, the size and length of the decline will likely set up the size and duration of the following bull market.

Size and Duration of Slump Influences Recovery+ Subsequent Growth 
One can divide stock markets falls into three categories: correction, secular, and fundamental. Each are different because their causes and impacts are different. One of the most difficult tasks for professional investors is to prepare for a decline before it happens. Most investors firmly believe that a current trend is their friend and choose not to prepare. They believe that predicting a decline is impossible. Furthermore, they believe that they will see early evidence of a decline and will be able to exit with relatively small losses from peak prices. The truth in markets and sports is that all trends eventually stop, often abruptly. What is particularly costly is the belief that the current decline is only temporary and not a cause for action.

With those thoughts in mind I’ll examine the most frequently occurring, and in many cases the most painful type of correction. Enthusiastic investors are the major cause of market corrections. They ride an upward trend of expanding price valuations that get way ahead of fundamentals. For example, many stocks have recently gained over 20%, even though earnings were likely to be down in the fourth quarter. They are also likely to be down in the first quarter of the new year, contributing to the mid-single digit gains expected for 2020.

A market correction is often not tied to an economic contraction. Paul Samuelson, the great MIT economist, is quoted as saying "The stock market has predicted nine of the past five recessions". Typical market corrections are of the 10% magnitude and only last a couple of months. In the history of market analysis, often called technical analysis, the fall is due to "weak holders selling to strong holders at discounts". The painful part of the process is not the relatively small losses sustained by the weak holders, it’s the much larger opportunity loss of missing out on the recovery and subsequent growth thereafter.

Less frequent declines occur when upward earnings and economic trends are temporarily interrupted. If the pause is caused by a specific event not expected to be repeated, long-term investors will stay committed. The problem is that what was first believed to be temporary often stretches out over time. If corporations and other investors begin to believe that a major change has occurred and their expectations of future cash earnings from their investments decline, it may cause a change in investment policy.

As many secular trends will reassert themselves, the pause should be tolerated without investors being shaken out of their positions. Demographics, education, and health are likely to be such trends. Secular changes usually happen slowly but can be recognized after a few years. There are often a couple secular changes within a decade that are capable of taking the large-caps that dominate the popular averages down about 25% from their peak levels.

The largest decline by far is caused by fundamental changes in the structure of society. A good example of this was the Great Depression, which has some parallels with conditions today. In the 1920s the WWI peace dividend freed up capital markets, encouraging both individuals and corporations to take on substantial debt. This led the politically sensitive farm community to increase production with borrowed money. Additionally, public utilities evolved into highly leveraged holding companies and Wall Street brokers enticed new investors to jump into "The Radio Boom". Each of these inputs, and others, were eventually dealt with by unwise federal government actions.

Against his own instincts, President Herbert Hoover signed a material increase in tariffs designed in part to help and protect farmers. It however also led to a major drop in world trade, particularly for labor-intensive manufactured products. One of FDR's many new regulatory agencies, the Securities & Exchange Commission, worked with an activist Federal Reserve and raised the collateral requirements for margin. While the number of radios around the world continued to grow, their prices fell. RCA, the highest quality stock in the Radio Boom, declined and did not return to its former peak until the color television expansion in the 1960s.

These and other federal government actions probably turned a secular decline into a fundamental slump, lengthening the depression from its probable end in 1937 and delaying its recovery until the WWII expansion beginning in 1942. Depending on what indicator is used to measure the decline, an important fundamental change could reduce prices by more than 50%. In the case of the Great Depression, prices collapsed by 95% in some cases, if they weren't totally wiped out.

Are there parallels today? The sharp decline in farm income spurred on by NAFTA and tariff changes could be viewed as politically motivated, as is the global impetus to lower interest rates. While the S&P 600 small-cap index was the best performing major stock market index for the decade just ended, it was the worst performer last year. The winner was large caps, with the DJIA and S&P 500 led by their mega-caps. Information technology stocks were up 50% in 2019, about double the average return of US Diversified Equity Funds. Different periods produce different results. The S&P 500’s best decade was 1950-1959, gaining +19% compounded. The worst decade was 2000-2009, losing -0.86% annualized.

Help may be on the way from the private sector if the governments around the world don't interfere. Long-term interest rates are starting to rise and at some point they may exert some discipline on the leveraging going on. However, stock markets have not done well historically when central banks have responded to political pressures and made cheap credit plentiful. As equity owners, we are better served by borrowers being disciplined and managing their debts prudently.

Symptoms More Important than Temperatures 
Experienced medical personnel are guided more by a patient's symptoms than by temperature, pulse, and blood pressure readings, as people and conditions can be dramatically different. Consequently, as an analyst I pay much more attention to symptoms than a specific numerical reading. Everything about modern living and markets happens at different rates of change (10% for corrections, 25% secular interruptions and 50% plus for fundamental change). The markets don’t readily march to a calendar either, even tax dates are only momentarily important. In evaluating stock markets, it is much wiser to watch people and how they react than fixate on specific numbers.

Contrarian Interests 
For investors not involved in competitive races, utilizing a streak of contrary thinking can lead to smaller losses and bigger gains over the long-term. On a given day a slow horse can be a winner if it is just a little faster than the others. I often see a change of leadership between small and large-cap securities, also emerging markets and venture capital investments. The most profitable bets are often contrary to the size of their flows. Consequently, I would now bet on energy stocks vs. information tech, small vs. large-cap, emerging markets equity vs. venture capital. Contrarians generally suffer smaller losses.

Question of the week: 
Do you know more contrarians who are currently broke or formerly wealthy individuals who are now broke?



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/12/repeat-past-history-probable-or-just.html

https://mikelipper.blogspot.com/2019/12/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2019/12/faulty-decision-processes-at-change.html



Did someone forward you this blog?
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2019
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.

 

Repeat Past History Probable or Just Possible? - Weekly Blog # 609


Mike Lipper’s Monday Morning Musings

Repeat Past History Probable or Just Possible?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –



Historical Lessons 
Like most professional investors my first tool in dealing with an uncertain future is my knowledge of history. I pay particular attention to military history and horse race betting. The growing enthusiasm for the US economy and stock market is leading many other markets higher. An almost universal belief persists that 2020 will not see a recession. One sign of a top is excess enthusiasm and we appear to be marching quick-time along that path. Military history warns of the dangers of a sneak attack.

Many historians studying the last two World Wars point to the underlying causes and the immediate events preceding them. The underlying cause of both wars was the presumed weakness of the US, both economically and militarily. It lacked the ability to maintain the global balance of power when presented with increasingly aggressive drives by Germany and Japan. The initiating causes presented to the public were the assignation of the Archduke, heir, to the Austrian Throne and the sneak attack on Pearl Harbor. These events gave political cover to the leaders who sought to defend their countries by going to war.

I am not predicting these types of events, but I am aware that they can happen. Consequently, I’m examining possible triggers for a meaningful reversal of the current enthusiasm, which could cause chaos in both the stock market and greater economy. The resulting chaos would not be so bad, except to investor egos and confidence. Sun Tzu, the earliest great military/political strategist is quoted as saying "In the midst of chaos, there is also opportunity."

Contrarian Signs
1. In the US the fixed income market is much larger than the market for stocks, a reality not captured by the media. The owners of fixed income securities expect to either own them through maturity or play price peaks and valleys, adding or subtracting price movements to their total returns. As the terminal value at maturity is known when these securities are issued, investors become much more aware of anything that could reduce their value. Most issuers are directly or indirectly influenced by the movement of interest rates and are therefore much more sensitive to economic conditions than most stock buyers focused on corporate prospects. Fixed income securities prices often move six to eighteen months before the stock market reaches a peak or trough.

Adjustable mortgage base rates have started to rise, although they are well below the rates of a year ago. The yield curve for US treasuries is rising, especially for maturities that are five years or longer. The year-to-date average total return for the 43 General US Treasury mutual funds is a way above average +10.69%, but has declined -2.01% in the fourth quarter through last Thursday, suggesting the deterioration is relatively new.

"Bond Risk Seen in Leverage Loans" was the headline in the weekend edition of the WSJ. The article focused on the ratio of credit rating downgrades to upgrades, with 3 times the number of downgrades to upgrades on traded loans. The Financial Stability Board also noted the weakened documentation of loan agreements, i.e. weakened covenants.

2. One of the more common places to hide from expected market, currency, or economic declines is precious metals. Currently, there are 65 pure stock fund investment objectives tracked by my old firm. Of these, only 7 are up over 30% for the year through Thursday. In third place are the 76 Precious Metals Funds which have averaged +37.41 % year-to-date, with 16 being among the top funds for this week. Interestingly, the price of physical gold is not higher than it was this summer, suggesting stocks of gold and other precious metals mining companies are viewed as having better prospects than the price of the metals. This may be true, as their earnings will benefit from both their debt structure and their high fixed-cost operations.

3. In December, corporate insiders sold an unusual amount of their own shares. It could be that they need cash to exercise some options coming due, or that they fear capital gains tax rates will rise materially.

4. In the latest week, half of the 20 stocks in the Dow Jones Transportation Index declined. As passenger traffic is good, I suspect sellers are expecting lower than forecasted freight revenues, which aligns with the lower expectations of their industrial customers.

5. There is not much difference in the five-year total return performances of the following four investment objectives:

Domestic Sector     +5.79%
World Sector        +5.89% 
World Equity        +5.93%
Mixed Asset         +5.82%

All had hoped to beat the leading equity investment objective, US Diversified (USDE) +8.99%. It appears that on average, being diversified produced a roughly 3% advantage over more narrowly constructed funds. It is worth noting that the five-year returns were roughly equal to the progression of earnings and returns on equity, although those observations should not apply to a portfolio of funds gaining 20% or more.

While each of the following investment objectives generated way above average gains for the past fifty two weeks, they did not outperform the USDE funds return of +29.93%.

Domestic Sector   +25.54%
World Sector      +26.70% 
World Equity      +24.26%
Mixed Asset       +19.71%

The last category was hurt by the inclusion of poorer performing fixed income and international holdings.

6. Of the 17 non-leveraged peer groups of funds within the USDE classification, seven performed within the range of the above-mentioned groups of funds. Offsetting these slower performing funds were four growth fund peer groups and S&P 500 Index Funds. However, as stated in earlier blogs, one should look deeper. You should recognize that the NASDAQ Composite has been the leader of the popular stock indices for some time. This composite added 1000 points in 176 trading days. Nearly one third of the gain was attributable to the five stocks shown below. The table displays their gains and weight in the NASDAQ Composite:

                                 Weight in
Stock Name Wtd Gain     NASDAQ Composite
Microsoft         +56%              8.8%
Apple             +83%              8.4%
Amazon           +23%              7.1%
Facebook          +58%              3.6%
Alphabet "C"      +31%              3.5%

Many stocks in smaller market-cap peer groups also benefited as suppliers to the five stocks mentioned above. The key observation is that the gains in the averages are not representative of many stocks. Thus, some of the enthusiasm for the market and the economy may prove to be misplaced.

Investment Conclusions
For many long-term accounts, this is not the time to be adding additional risk. Because we are late in the investment cycle, disappointments could trigger sales. Particularly large gains have unbalanced many accounts and should gradually be re-adjusted.



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/12/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2019/12/faulty-decision-processes-at-change.html

https://mikelipper.blogspot.com/2019/12/investors-are-worrying-about-wrong.html



Did someone forward you this blog?
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2019
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.

 

Winning Investment Strategies Shrinking - Weekly Blog # 608


Mike Lipper’s Monday Morning Musings

Winning Investment Strategies Shrinking

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –



Premise: Winners are not Good Teachers
In the Northern Hemisphere this is the season where sports fans look forward to identifying the best team to crown as champion of their league. They celebrate the stars that did exceptionally well, but because we don’t like to pick on those that are down, we avoid focusing on the players that performed badly. This highlights the difference between a good sports or investment analyst and one likely to perform poorly in the future. As a contrarian I believe I learn far more from the mistakes of previously competent players than the exceptional winners.

Matter of fact, most winners owe their success to the mistakes made by others, something that is certainly true in military history. Many competitors try to model themselves after recently crowned champions,  but more often than not those who study a broader list of mistakes made by individuals, and their managements will be on the way to becoming future champions. (General George Washington was one who learned from early battle losses.)

Applying Lessons to Professional Investment Battles
Since every investor starts with some cash and perhaps some borrowing capability, all investments and investors are in competition. Most choose to stay in the middle of the pack rather than venturing out to the extremes. Nevertheless, it is not what a single investor or a single investment does, it is what others do that determines the absolute and relative profitability of the decision.

Why is this? It has to do with what is called the weight of money. (A lesson I learned from the real investment professionals at Fidelity.) Prices don’t move on the basis of brain power or information, but on the size of the flows into and out of investments. (This is the fundamental basis behind technical or market analysis.)

Flows follow Performance
Brains don’t move prices, conviction as measured by the size or the weight of money behind the flows do. No one is required to sign an affidavit as to why we do anything, it’s what we do and with what size or force. In viewing different asset classes we can see that the lack of  money going into commodities and some elements of real estate has led to flows into some equities and somewhat indiscriminately to fixed income.

Excessive Flows are Often Late
As with most investment rules and policies they can be taken to an extreme, which might be viewed as an antidote to the weight of money argument. One critical element of flows is who the sellers are at various prices, or for fixed income securities, yields. In many cases the sellers are more disciplined than the buyers. Owners of fixed income products are initially interested in current yield, but those like pension plans are also focused on the reinvestment of their interest payment receipts. When rates are too low they may decide to exit the fixed income asset class with their profits and explore total return vehicles, largely equity-oriented investments.

In the third quarter, worldwide equity funds had net redemptions of $3 billion, bond funds net inflows of $271 billion, and money-market funds net inflows of $311 billion. The smarter sellers may be speaking, especially if you consider that interest rates are among the lowest in 500 years, before the inflation caused by the discovery of South American gold. Even though rates are low, the yield curve is becoming a bit steeper. Currently, the thirty-year US Treasury yield is 2.35%, which may be the “market’s” guess of the long-term inflation rate. Some escapees from high-quality fixed income and some nervous equity investors are congregating in high yield paper/funds. Moody’s (*) has expressed their concern after rising prices in this category, fearing an increase in problems for future issuers.

(*) A position in our Private Financial Services Fund)

All is not Great in the Domestic Equity Arena
  1. The US dollar’s rate of exchange is softening, making foreign investments more attractive. 
  2. Too much attention is being paid to the S&P 500, which year-to-date is producing a return north of 30%, including reinvested dividends. What is not being noticed is the significant number of stocks producing lower returns, particularly the value-oriented and industrial company stocks found in many portfolios. The latter dealing with lackluster sales and weakening prices. 
  3. Low interest rates are allowing companies that should close to limp along and depress prices. 
  4. The very volatile American Association of Individual Investors sample survey, a contrarian indicator, showed 44% of investors being bullish vs. 20.5% bearish. (Most readings are in a 20-40% range.)
  5. The oldest Central Bank in the world has given up using negative interest rates. Sweden, a very respected central bank, is now no longer one of the few negative interest rate users. I suspect some central banks and investment people with a knowledge of history see higher rates in their future, perhaps much higher.
A useful set of indicators
The New York Stock Exchange (NYSE) currently trades 3,099 issues and the NASDAQ 3,466. Historically the NYSE had more stringent listing standards, so on balance it has older and higher perceived quality. Both had 47 issues that were unchanged last week. The NYSE had 2.6% of its stocks hit new lows, whereas the NASDAQ had 20% hit new lows. The NASDAQ Composite has gained +38% this year and the DJIA +25%. On average the NASDAQ attracts more active traders than the senior exchange and thus may better reflect sentiment.



Question of the week: When was the last time you looked at your fixed income investments with the same scrutiny as you do your stock investments?



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/12/faulty-decision-processes-at-change.html

https://mikelipper.blogspot.com/2019/12/investors-are-worrying-about-wrong.html

https://mikelipper.blogspot.com/2019/11/contrarian-stock-and-bond-fund-choices.html



Did someone forward you this blog?
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2019
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.