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Tis the Season of Joy & Reflection - Weekly Blog # 920

Mike Lipper’s Monday Morning Musings

Tis the Season of Joy & Reflection

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

The Season

Around the world families and friends gather to exchange holiday wishes with those who are close to us, either in person or through electronic devices. We express feelings of goodwill, with the hope that all are happy and in good health. We often harken back to times of shared thoughts as we communicate with one another.

As we get older, we reflect on the progress that we and those close to us have made over time. It is remarkable how much success we have had and do not dwell on less happy periods we have passed through. Those of us who carry the investment and political bug lapse into thoughts about the unknown future, which will likely bring periods of happiness and sadness. As an addict of history, I know we will live through both types of times. My wish for all of our families and friends is that we continue to enjoy more good than bad periods, and most importantly learn from both.

Last Week was not of much help, or was it?

The first three trading days showed more losses than gains. The last two days generated advances that more than made up for the earlier losses. For the week there was a slight gain, leaving the three main stock market indices less than 3% from record levels. (For most of 2025 the S&P 500 traded in a relatively narrow band. Market analysts often believe this type of banded performance is the storing up of energy to either break up or down by a significant amount.) However, looking at the week as a whole, 50.8% fell on the NYSE and 60.1% fell on the NASDAQ. On the “Big Board” there were 233 new highs vs. 198 new lows, while on NASDAQ new lows were the majority, 554 new lows vs. 352 new highs. (Since the NASDAQ has risen more for the year, I believe it is a better guide to professional thinking, at least at the moment.)

What is more important?

All market analysis is about picking the expected period of ownership. Warren Buffet would like to never sell a stock he’d bought for Berkshire Hathaway, which is owned by us in client and personal accounts. (This may change a bit under the new CEO of Berkshire.) His approach is followed by other publicly traded family holding companies, who additionally own shares of Belgium, Canadian, French, Italian, and Swedish companies. (For the most part, all of these companies invest for the foreseeable long-term, which we try to copy.)

In looking at the long-term, we expect that stock prices to be cyclical, with some down periods. Most of these holding companies are buyers of stocks below their perceived long-term investment value. (We try to do the same.)

Applying this thinking to 2026

Having learned analysis at the New York race tracks I look for a wide gap in the odds posted, which measures the amount of money invested in each horse and the self-determined probability of each opportunity. When the gap is large it is worth a bet. Recognizing that in order to win I must overcome track fees, individual expenses, taxes, and racing luck. There is also a near certainty that on average I will be wrong (premature) on some individual bets, but right on monies bet and earned. When this logic is applied to investing in stocks and funds, I am very selective and very conscious of the investment environment. When the bulk of the crowd is betting considerable amounts of money in one direction, I don’t bet or at least bet very differently than the crowd.

Currently, the crowd believes stock prices are attractive and are expected to rise as they have for a number of years. However, each year that stocks rise reduces the probability of them rising in subsequent years. Considering the number of years of positive performance, the chance of a repeat is low. Especially when you consider the US election cycle, a bullish government reducing domestic constraints, Ukraine, Middle East tensions, an ambitious China, and technological challenges.

The one thing wrong with my outlook is the frequency of the number of declines over advances. There were some sellers in the late 1920s, one of which was my grandfather, to the benefit of his clients.

This may not be the time to be 100% in or out. What do you think?

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Mike Lipper's Blog: Are Investors Seeing a Change? Politicos Are Not - Weekly Blog # 919

Mike Lipper's Blog: On The Way To Casualties & Eventually Riches - Weekly Blog # 918

Mike Lipper's Blog: Was it the week that wasn’t? - Weekly Blog # 917

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Are Investors Seeing a Change? Politicos Are Not - Weekly Blog # 919

Mike Lipper’s Monday Morning Musings

Are Investors Seeing a Change?

Politicos Are Not

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

Was the latest week instructive?

During the low volume week: the DJIA fell -0.51%, the S&P 500 fell -1.07% and the NASDAQ fell -1.69%. One does not know a trend is over until a meaningful reversal of direction has occurred, which quite possibly was the case this week. On the NASDAQ there were more decliners than gainers, unlike the “Big Board” where there were more gainers. However, since the April 8th bottom, the NASDAQ Composite Index has led the US general stock market, gaining +51.92% compared to +37.02% for the S&P 500 and +28.72% for the DJIA.

The supporters of the political party that currently occupies leadership in both chambers and the White House cheer these recoveries but appear to ignore other data. For example, real private non-residential fixed income investments, excluding data centers, have been flat since 2020 and is far behind 2023 prices.

The Real Problem is Bad Debt Creation

For the “bulls” to be proven right, a large portion of the public’s uninvested money must be corralled to invest in the economy, in sufficient amounts necessary to generate the tax revenues required to support government spending and address the growth of the deficit. Instead, they are doing this by removing the Controller of the Currency and the leverage lending guidelines of the Federal Deposit Insurance Corporation (FDIC), which they felt were too restrictive. To add more fuel to risk capital they are encouraging retail investors to put some of their retirement income savings into private debt investments, even though there has been an increase in bankruptcies over the last four years.

Economic Tailwinds

Optimist believe the economy should have the wind at its back in 2026 due to the following positive events resulting from the “Big Beautiful Bill”. However, it remains to be seen whether these events translate into additional stock market gains or if these events are already reflected in current market prices. Some of these events could also be negatively impacted by Supreme Court decisions on tariffs.

A relatively large number of taxpayers will see tax reductions in 2026, with some seeing tax refunds early in the year.
Reduced regulations should decrease the cost of doing business and speed up the introduction of products to market.
The reshoring commitment of over $18 trillion in manufacturing capacity should boost construction and the jobs required for that task.
AI capacity construction should continue throughout most of 2026.
Energy capacity construction will likely increase in 2026, with the introduction of small-scale nuclear power and construction of a new natural gas pipeline from Pennsylvania to New York.
The House of Representatives passed a $900 billion military budget, which includes pay raises and an increase in defense spending. This bill still needs to go through the Senate before it becomes law. Some of these funds will be used to retool the military for modern warfare, which includes increased use of AI and unmanned vehicles.

Various underwriters are predicting that equity markets will generate double digit rates of return. On a long-term basis this is extremely difficult to do and can only be achieved by accepting the risk of periodic losses. By year end the year the S&P 500 Index could see its third consecutive year of annual gains exceeding 20%. Only once, from 1995-1998, has the market seen a 4-year period of consecutive annual gains of 20%.

Bottom line: Be Careful

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

Mike Lipper's Blog: On The Way To Casualties & Eventually Riches - Weekly Blog # 918

Mike Lipper's Blog: Was it the week that wasn’t? - Weekly Blog # 917

Mike Lipper's Blog: Recession/Depression Risk Assumptions - Weekly Blog # 916

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On The Way To Casualties & Eventually Riches - Weekly Blog # 918

Mike Lipper’s Monday Morning Musings

On The Way To

Casualties & Eventually Riches

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

Current Situation

In the fog of the latest week there were a few possible clues of changes and pronouncements.

In November, US manufacturing activity contracted for the 9th month.
After Friday’s close, an emerging market fund rose +4.99%.
The value of the US dollar has fallen -6.16% year-to-date.
Financial Times headline: “Wall Street expects double digit gains next year”.
Apollo provided a glossy wrapper to the weekend Wall Street Journal, titled “What if the old financial playbook is costing you?”
The Trump boom is comparable to past expansions, but not yet as big a percentage gain of GDP as the railroad boom of the 1880s.

Each of these bullets point to possible clues for the future, which should be examined by long-term oriented investors and their managers, as this blog will attempt to do.

The search for Investment clues

While we have become a service-oriented economy with high dependence on the skills and attitudes of workers, politicians focus more on the manufacturing sector which has more unions and workers paying real estate taxes and buying lots of local supplies. Thus, manufacturing jobs are more important in Washington than in NYC. I suspect the re-shoring of manufacturing will probably be more automated and will have less employees. Consequently, office holders need to worry about ’26 and ’28.
The real purpose of announcing tariffs was to force meetings with economic leaders to reduce non-tariff trade barriers. This has led to numerous currencies dropping more than the US dollar. (In my view, this is the wrong way to create more prosperity. We should be raising interest rates, so we are able to absorb the likely increase in bad debts, particularly those held by private capital. Higher interest rates will also raise foreign exchange rates, encouraging foreign lands to utilize more of our exports. A richer world is safer and better for us than a poorer one.)
The “street” is predicting at least a 10% gain next year. This year the median US Diversified Mutual fund produced a year-to-date gain of +12.55% and an annualized gain of +10.12% for the five-year period, this is at least 2-3% better than the expected net income gain. The difference is the result of other income and stock buybacks. Currently, public polls suggest investors are not happy with the results.
Bankruptcies are increasing, particularly in non-listed companies. Private capital raises money to invest in the equity of these companies or to buy parts of public companies. Some of the private-capital is sold to investors as an income producing asset, which often requires a periodic sale of some of their assets. In some cases, this has proven to be difficult because some of their holdings experience difficulties. (While there is some trading of assets between privates, the remaining assets need to be sold to listed companies. This may resemble the old game of musical chairs, where one or more of the ‘safe’ chairs are removed after each round. The remaining chairs will be purchased by the public market, so the private market is dependent on the public market in the end. My concern with regulators encouraging retail investors to put some of their retirement money in private vehicles is that they will be buying into troubled situations.)
The comparison of the “Trump Expansion” with the railroad expansion of the 1880s could be accurate. It was a period of speculative, and in some cases fraudulent activities. Many new issues came to market competing with existing firms, which led to price wars and consequent bankruptcies. The era ended when JP Morgan and others recognized that too much competition was ruinous, resulting in rigorous rounds of mergers. Much money was lost and many communities lost rail service.

Conclusion

We have entered a globally different world. Investors need to study carefully and invest for the long term, periodically choosing not to invest.

Thoughts?

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Mike Lipper's Blog: Was it the week that wasn’t? - Weekly Blog # 917

Mike Lipper's Blog: Recession/Depression Risk Assumptions - Weekly Blog # 916

Mike Lipper's Blog: Risks Are Rising Thru the Clouds - Weekly Blog # 915

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A. Michael Lipper, CFA

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Was it the week that wasn’t? - Weekly Blog # 917

Mike Lipper’s Monday Morning Musings

Was it the week that wasn’t?

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

Does 3 ½ US Trading Days make a week?

The bullish media and “street” pundits were thrilled that the 3½ day trading week restored early November losses to the popular stock averages, although they were disappointed the rise did not breakthrough to new highs. Looking at the results, they resembled a week from a younger bull market.

Reality may have been the problem

At least one analyst calculated that if you eliminated all “AI” related activity since 2019 “the market” is probably down. This suggests that since 2019 we have experienced a slowly declining bear market. The Conference Board’s measure of confidence recently dropped to 88.7%, which was more than the expected reading of 93% and the prior reading of 95.5%. HP, the old equipment producer part of Hewlett Packard, joined many other large employers in announcing expectations of a 10% job cut. The American Association of Individual Investors (AAII) sample survey for the last three weeks reported bullish projections of 32.0%, 32.6% and 31.6%, respectively for the next six-months. Their bearish projections remained in the 40-49% range.

Regular subscribers to these blogs have learned of my concerns about the declining quality of balance sheets, a warning sign of economic turmoil. One measure of this is the much larger growth in volume on the NASDAQ vs. the “Big Board”. In the short Friday trading session, the decline in volume on the NASDAQ was twice as large as the percentage decline on the NYSE.

Two Causes of Economic Turmoil

As with the runup to the 1929 crash, the Roaring Twenties led to overconfidence (AI?) and unsound leverage (Private Capital?). The organizational hollowing out is causing an increase in execution risk. Governments, universities, businesses, and families reacting to increasing financial strain are looking to improve efficiencies. Efficiency, not effectiveness, is measured by output vs input. Many have assigned revenues or other outputs to those at both the top and bottom of the production ladder. The people in the middle, mostly supervisors/middle management, have not been credited with the output assigned to those at the top and bottom and have been reduced or eliminated entirely. One glaring example is the federal government, although this trait is found throughout society. The President has had difficulty getting many of his actions approved by the courts. In numerous cases there was insufficient careful staff work, which would have phrased efforts better or would have raised internal discussion instead of simple loyally in attempting to execute flawed orders. This is a pattern exhibited in other organizations.

Thoughts?

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Mike Lipper's Blog: Recession/Depression Risk Assumptions - Weekly Blog # 916

Mike Lipper's Blog: Risks Are Rising Thru the Clouds - Weekly Blog # 915

Mike Lipper's Blog: The Inevitable Recession - Weekly Blog # 914

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Recession/Depression Risk Assumptions - Weekly Blog # 916

Mike Lipper’s Monday Morning Musings

Recession/Depression Risk Assumptions

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

Future Probabilities

One intelligent betting task at the New York racetracks, where I learned basic analysis, was to guess the rough size of the gap between the betting pool odds and the probabilities. Only if the self-assessed probabilities were significantly larger than the crowd-determined payment odds, was it a sound wager. I try to apply the same approach to investing in stocks around the world. The easy part is determining the payment odds, which are based on two factors. The popularity shown in the market and guessing the quality of the current stock bulls, which is much more difficult. In general, more retail buying equals lower quality. This is not to equate brains with capital, but the amount of research done. There is an inverse correlation between the amount of media pundit space devoted to an investment and the probability of them being correct. That is not to say the pundits are dumb, they are limited by space and time and that limits their ability to handle complexity.

Determining probabilities often rests on the number of separate supporting elements. This is difficult because unpopular views normally have fewer supporting elements and are more complex. (If this happens then that will happen or at least improve the possibility of it happening.)

I have found that a search of history is useful in searching for probabilities. As there are no axiomatic rules, sometimes something will happen and sometimes it will not. The trick is to try to understand what caused the different outcomes. In dealing with history, we are lucky to have both written and geological records from around the world. From those records it is apparent there are similarities in what drives many critical trends, no matter the place or time-period.

Causes of Recessions

No one wishes for a recession, although we should expect one or at least the possibility of one. When a recession does occur, it is generally a surprise, and most are unprepared for it. In the beginning most don’t recognize they are experiencing a period of decreasing ability to make purchases and the ability to promptly pay debts. Hopefully, the economic community recognizes it soon after the nadir of the recession. The academic community only declares “official” notice of a recession after full recovery of lost resources.

In every recession I have studied, the critical realization of being in a recession occurs when the level of current earnings makes it difficult or temporarily impossible to repay what is owed on time. The squeeze on repayment is caused by an overly optimistic belief in current earnings and the absence of sufficient reserves. These conditions in turn are caused by imprudent personal, business, non-profit, and government decisions. Other causes are sloppy executions, which cause incomplete and wrong actions. Greed also drives actions without regard to consequences. There also appears to be an increase in fraud during a recession.

Causes of a Depression

Depressions are relatively few but longer lasting. For the most part they are caused by attempts to structurally pull the economy out of a recession. Typically, the leader of the government sees that the problems facing society are structural and immediately seeks to fix the problem.

In the US we have had four activist presidents who wanted to structurally change how we operate. These are Andrew Jackson, Thedore and Franklin Roosevelt, plus the current occupant of the White House. These leaders attempted to change many things but ran into opposition from the minority who used the Constitution and courts to block the changes. In addition, their actions created other problems for the country and globally after their terms.

Curren t Conditions

The following elements suggest there are problems ahead. My lens is primarily fixed on market analysis, not economic analysis. (This is due to belief that the market is primarily focused on the perception of future markets and not how past economic data impacts it.)

For the past 2 weeks there have been more declining than rising stock prices on the NYSE and NASDAQ.
For the last two weeks, the AAII sample survey shows only 32.6% and 31.6% bearish for the next 6 months.
Tech stocks listed globally fell last week.
Only 25% of weekly prices reported in the Saturday Wall Street Journal rose, the remaining 75% declined.
Last week through Thursday, my old firm reported that only three mutual fund peer groups out of 104 competitive leagues showed average gains - Dedicated Short +7.80%, Health/Biotech +0.98%, and Indian Regional +0.55%.

My Working Wager

Between now and next Presidential election, the odds on a recession are 60%, with the odds of a depression before 2035 at 50%. (Remember the market rises about 80% of the time.)

Your thoughts, please.

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

Mike Lipper's Blog: Risks Are Rising Thru the Clouds - Weekly Blog # 915

Mike Lipper's Blog: The Inevitable Recession - Weekly Blog # 914

Mike Lipper's Blog: Biggest Investment Hurdle: Complexity - Weekly Blog # 913

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

A. Michael Lipper, CFA

Contact author for limited redistribution permission.