Analyst Calendar: Preparation for 2026 - Weekly Blog # 895
Mike Lipper’s Monday Morning Musings
Analyst Calendar: Preparation for 2026
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Analysts should attempt to get ahead of the stock market.
Starting next Tuesday, we are entering the second half of 2025. Using the performance
of Large-Cap US Diversified Mutual Funds as a broad indicator of the experience
of US investors, the first quarter of 2025 was relatively strong, but April’s
second half was weak. Perhaps it was due to concerns about taxes, tariffs, and
international turmoil. The Market slumped into June, then recovered through the
final four weeks of the quarter, bringing average performance back to
mid-single digit gains, with half in the last week, despite a 9% decline in the
value of the dollar. Not a great foundation for the continuation of two 20%
gaining years.
Starting next week, analysts will quietly begin gathering
their thoughts on preparing forecasts for the next calendar year. For the most
part they will not have the benefit of the proclaimed or quietly guided company
estimates. The estimate for 2026 will be more difficult than prior years. Not
only will there be comparisons of two 20% plus years, but it is also unclear
what taxes, tariffs, and the value of the US dollar are likely to be. There are
two other quandaries that should be addressed. We have entered a period where there
is a shortage of necessary talent at companies. For tech companies there is a
struggle to find AI personnel at prices approaching Wall Street levels. Industrial
and service companies have approximately 400,000 open positions, despite many announcing
plans to lay-off workers. To some degree, this speaks to the quality of present
workers and their attitudes.
Another concern is the level of IPOs threatening private
equity portfolios with unattractive opportunities to sell some of their
holdings. These sales are necessary to raise sufficient cash to pay the dividends
expected by present holders and retail buyers. Private markets could contract quickly,
constricting private securities firms. An investment trend is normally near the
end of its popularity when it becomes dependent on retail buyers.
The answers to these questions may not be determined in the
third quarter. Even though the fourth quarter is the second highest selling
period of the year, it may not provide quick answers for marketing forces expected
to produce results.
It is possible the market may be saved through efforts in
the unofficial “fifth quarter”, which can deliver either surprisingly good
numbers or poor ones, setting up a splurge in the first quarter of 2026. These
will rely on the increasingly popular “adjusted” sales and earnings per share numbers
created through skilled accounting approaches. These are often approved by the
firms’ accountants and are not objected to by the regulators.
The problem with this exercise is that it makes the
following year more difficult for analysts and investors to understand the base
for the real earnings power of the company next year.
Buyers be thoughtful.
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Inconclusive Week Hiding a Big Problem - Weekly Blog # 894
Mike Lipper’s Monday Morning Musings
Inconclusive Week Hiding a Big Problem
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
4 Day Summer Week
Two days of limited stock price gains and losses, with more
stocks falling than rising. Market chatter was focused almost exclusively on
the Israel-Iran war, with no Fed interest rate change. As usual from a
long-term investor’s standpoint no attention is being paid to the continued
destruction of the fundamental case for long-term investing. (Not surprisingly,
this week’s American Association of Individual Investors’ (AAII) sample survey showed
a shrinking six-month outlook for the “bulls” and an expanding negative view of
the “Bears”.)
We have probably measured human productivity in business and
non-profit organizations, including in academia and health care, since the beginning
of human activity. Top-down, it has been declining for some time. To find the
wasteful culprit accountants assigned organizational revenues and profits to
various individuals. This was easy to do for front-line workers and senior
management, but the middle of every organization was left out.
Left out were the human supervisors, often labeled foremen
or middle management. In a period where top-line growth has slowed toward
population growth, there is increased concern about human productivity levels. Since
the swollen middle was not directly considered revenue or profit makers, their percentage
of the workforce shrunk. As a society we are now paying the price for this lack
of understanding of this value creation.
In far too many cases the supervisory class were the main
purveyors of organizational culture, responsible for producing
customer-oriented quality. There are hardly any organizations which have not
experienced a decline in quality from the users’ point of view.
We are about to pay a higher price for this hollowing-out
process as new activist management, particularly from the Washington quality
culture, becomes a reality. This is especially true as thruput per person
becomes the mantra and “AI” and other statistical measures are being
implemented. With new activist leaders in Washington, I am worried many
government and academic services will decline and to some not add value.
As fellow consumers, please share with me any services you
receive from organizations that have improved recently.
Note: At this point we doubt the bombing of the nuclear sites
in Iran will change much long term.
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Mike
Lipper's Blog: We may think we manage time, but time manages us - Weekly Blog #
893
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Lipper's Blog: Selective Readings of Data - Weekly Blog # 892
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Lipper's Blog: No One Knows: Searching for Clues - Weekly Blog # 891
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We may think we manage time, but time manages us - Weekly Blog # 893
Mike Lipper’s Monday Morning Musings
We may think we manage time,
but time manages us
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Recognition
When asked for investment advice the most appropriate
response is, what is the expected pay-off time? That should be followed by what
critical actions are expected during the “work-out” period? The answers to
these questions will show both the humility and arrogance of the expectation of
success.
The plain truth is, we collectively don’t know what the
future will bring. The future course of events will be dictated by natural
elements, what others do to us, and what we do to ourselves. (Today being
Fathers’ Day, it is wise to include the impact of the entire heritage of our
thinking and be thankful for it.)
The best way I have found to come up with usable answers is
to rely on what I’ve learned at the racetrack, which is to assign odds to
various logical outcomes. The purpose of the exercise is not the numbers, but a
way to rank the various opportunities, remembering that I can be wrong.
The real benefit of the exercise is when I am proved wrong. What
order of possibilities would have been better? This may include the theoretical
Charley Munger and Warren Buffett box, labeled too hard to predict. (The other
two boxes were yes and no.)
Applying the Approach
Starting with a deep depression, the most extreme example being
the falling stock prices between 1929 and 1942. During those years there were
periods of rallies and declines, but the extremes were not broken. Prior to that
period there was extreme growth of corporate and farm debt. There was an
increase in the belief that central governments could materially alter the
course of the general economy. Also, during that period an activist political
force tried to change the laws and regulations beyond their authority.
I have frequently reminded subscribers of the quote that history
does not repeat itself but often rhymes. Using the methodology of assigning
odds to a potential depression, I suggest there is at least a 40% chance current
conditions are predictive of an oncoming depression.
Other Problems
- The World Bank has cut its prediction of global growth from 2.8%
to 1.4%.
- Moody’s has warned that selling private asset funds to
retail clients introduces new risks to private asset managers, including
“reputation loss, heightened regulatory scrutiny and higher costs.”
- Robert Gates, former Director of the CIA, Secretary of
State, and a former independent Director of Fidelity Funds, wrote “The US can
rise to the Chinese challenge” and needs to.
- At least 170 large public companies expect to announce job
cuts in June. These companies announcing job cuts do not include private
companies, which employ much of the US work force.
While I perceive a more than average number of problems related
to investing in US equities over the next few years, I remain bullish about investing
in US equities. Our geographic position, the dollar size of our commercial and
financial markets, and our eventual ability to surmount our problems, all support
continued stock investments in the US for long-term retirement investment
accounts.
What do you think?
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Mike
Lipper's Blog: Selective Readings of Data - Weekly Blog # 892
Mike
Lipper's Blog: No One Knows: Searching for Clues - Weekly Blog # 891
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Lipper's Blog: “Straws in the Wind”: Predictions? - Weekly Blog # 890
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Selective Readings of Data - Weekly Blog # 892
Mike Lipper’s Monday Morning Musings
Selective Readings of Data
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Assumption
I assume as a careful reader of these musing one cannot
avoid the “happy talk” produced by most of the media. For balance, as a public
service for my blog readers, I’ll focus on data and other information supporting
the other side.
Long-Term
Jaime Dimon, the CEO of JP Morgan Chase, was recently quoted
as follows: “If we are not the pre-eminent military and pre-eminent economy in
40 years, we will not be the reserve currency…” He is pleading with you to
develop four views that he considers critical to a sound investment philosophy.
They are the importance of military standing, economic position, having a forty-year
view (the bulk of institutional and individual money is invested for long
periods), and the significance of being the sole reserve currency.) I will be
happy to discuss your views on these questions.
Others’ Views Focused on the Short-Term
Recently, 17 well-known investment advisors made estimates
of the Standard & Poor’s 500 Index 2025 closing price. Nine estimates were higher
and eight lower. The lowest was JP Morgan Chase, 13% below Friday’s close. (Of
all the various stock market indices, I believe the S&P 500 Index is the best
to gage the level of the market. On Friday it only gained one tenth of 1%, showing
the stickiness of the movement.) Morgan Stanley is expecting the US dollar to drop 9% over
the next year.
Unfavorable Conditions
Retail investors of all sizes are being told to invest in
private investment vehicles, including private equity. These investments represent
some 30% of the M&A market. History suggests the public buyers come into
many trends last.
Currently, there are 7.5 million unfilled job openings.
Employers can’t find suitable workers. I believe many potential employees lack
sufficient motivation, discipline, and/or integrity for these jobs. This is
leading to a low growth rate in labor productivity.
The employees themselves are one reason for these conditions
at commercial, government, and nonprofit institutions. Due to the slow growth
of our society there are pressures at all levels of management to improve labor
productivity. Managers strive for efficiency, defined as output divided by
input. The simple way to do that is to assign generated revenue to each worker.
This is relatively easy to do for line employees, by leaving out the supervisors.
The next step is to reduce the number of supervisors. This creates efficiency. However,
supervisors create most of the worksite culture, which leads to product and
service quality.
In just about every sector of modern life we are experiencing
a decline in the quality of the products or services we receive. However, as a
result of employers not hiring more experienced quality supervisors, this has led
to customer dissatisfaction, lower customer/client loyalty, lower sales, and fewer
recommendations. Employers should be hired for effectiveness, which would reduce
costly mistakes and improve relationships.
Two World Realties
As long as we have politicians and their advocates chanting
happy talk about the economy while employers cut back on hiring, we are going
to experience a dichotomy in the investment world. We can hope for the best but
should be prepared for the worst.
The Form Does Work
As many subscribers already know, I count my former time at
the New York racetracks as a critical learning experience. Consequently, the
running of the Belmont Stakes, which was run early Saturday evening, is very
important to me. The race is now one quarter mile shorter than the traditional
1½ miles, which means its long history of winning times is no longer relevant
to racing analysts (handicappers). From
a betting/investment standpoint, the job of the analyst is to evaluate the odds
of a particular horse winning vs the odds posted on the tote boards. These odds
are derived from the amount of money invested on each horse, including taxes
and fees paid to the track. The smaller the odds, the more popular the payoff selection
on the winning horse. In many ways this is similar to the most popular
investments in the marketplace. It is important to remember that the most
popular bets, called favorites, win a minority of the time. But they do win more
often than the less popular bets.
The first three horses crossing the finish line at the
Belmont Stakes were the same three horses finishing in that order at the
Kentucky Derby. Thus, the history of these horses proves to be a good predictor.
Can stock buyers count on a similar phenomenon in picking stock investments? It
is occasionally possible, but not all the time.
If using lessons learned at the racetrack seems a bit odd,
think about Ruth and I attending a New Jersey symphony concert on Sunday
afternoon. This featured two great classical performers, Xian Zhang, conductor
and Conrad Tao, pianist. They impressively played Sergei Rachmaninoff’s second
piano concerto. This piece was a breakthrough work marking Rachmaninoff emerging
from a three-year depression. The length of the depression could be a useful
guide to an investment depression, unless the government lengthens the period
of the depression, as FDR did in 1937.
Thoughts?
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Mike
Lipper's Blog: No One Knows: Searching for Clues - Weekly Blog # 891
Mike
Lipper's Blog: “Straws in the Wind”: Predictions? - Weekly Blog # 890
Mike
Lipper's Blog: After Relief Rally, 3rd Strike or Out? - Weekly Blog # 889
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No One Knows: Searching for Clues - Weekly Blog # 891
Mike Lipper’s Monday Morning Musings
No One Knows: Searching for Clues
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
President Trump
Judging by the frequency of changes emerging from 1600
Pennsylvania Avenue, Mar Lago, and Bedminster NJ, even Mr. Trump doesn’t know
what will happen. Furthermore, one gets the feeling that what he wants appears
to change over time. While he can wait a bit, people with portfolio
responsibilities often cannot. In addition to many of the same concerns facing
the President, we must deal with the impact of the unknowns on our clients and on
our own fears. In an attempt to provide some soothing ideas using our somewhat
unique search for clues, I stand ready to attempt to apply these concepts to
your individual concerns. Below are my brief thoughts on trying to evolve an
overall investment strategy.
May Meeting of the Federal Reserve Board
Under Powell, members of the Board really cogitate about the
long-term outlook. Part of the reason for their current cautious attitude in
terms of interest rate changes is a period of potential stagflation, which
would be difficult for the Board to manage. It would be difficult for investors
to properly position their portfolios and still be in position at the correct
time for a subsequent expansion.
There are at least two very current clues that such a period
is now possible, with after tariff expenses paid by the supply chain and/or the
retail buyer. For the week, both the Big Board and NASDAQ had more prices closing
down than rising. Also, this week’s sample survey of the American Association
of Individual Investors (AAII) had the six-month bullish view of 32.9% dropping
below the bearish projection of 41.9%. The prior week the two readings were 37.7%
and 36.7%, respectively. The Fed is very concerned about inflation expectations.
Historical Clues
Recorded history is replete with partial descriptions of
cyclical behavior, both human and natural. Though recessions are not identical,
they are similar in many cases and can be roughly divided between climate and
man-made. Man-made events are largely caused by excessive debts and
insufficient reserves, which can be broken down into two categories, cyclical
price problems and the less frequent and more serious structural problems.
As with most problems, the people experiencing them don’t
recognize what is really happening to them until later. Concerning what we are
now experiencing, a couple of columns published this weekend in The Financial
Times may be instructive.
- One article noted that US private equity has 12,000 investments
in their portfolios. If they could sell 1500 of them each year, it would take
eight years to totally liquidate them all. As many private equity vehicles have
been sold to retail customers as income-producing investments, the periodic
sale of their investments is critical in supporting sales in the portfolio. A
problem suffered by many mutual funds.
- Gillian Tett, in her column discussing current tariff
concerns, noted that “Trump’s bark is often worse than his bite. The courts
also sometimes rein him in, as seen this week. FDR, another activist President,
had similar problems with the courts’ actions.
Taiwan
Until this week I was not overtly concerned about a
successful amphibious landing of Chinese forces in Taiwan. As a former US
Marine Combat Cargo Officer on an Amphibious Personnel Attack (APA) ship responsible
for landing Marines on an unfriendly beach, I thought landing on a defended
beach in Taiwan would be difficult.
To the best of my knowledge, the Chinese did not have a
significant amphibious effort. This week I learned they have ships similar to
what I was on over 60 years ago. In addition, the Chinese have significant
troop-carrying helicopters capable of deploying Special Forces on the island to
attack defending forces on the beach. Certainly by 2027 the Communists will be
equipped to make a successful attack. Perhaps the only real defense of Taiwan
is the threat that the US could use nuclear bombs to destroy the TSMC
facilities. Let’s hope it does not come to that.
Current Reactions
Mutual Fund investors are concerned about the current
outlook. Last week I noted that both Asian and European fund returns were
recently competitively better. Year-to-date through May 29th, peer-group
leadership has rotated to small-cap, mid-cap, Healthcare, and Natural Resources
sector leadership.
Portfolio Management
Position changes should be a little at a time. Exposure to
winners that have become very large should be tailored. Companies reporting
disappointing results should be examined to identify if timing was a problem, or
a reaction to excessive withdrawals, political issues within the organization,
or bad judgement. One should be humble in making decisions.
Call us if we can help.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: “Straws in the Wind”: Predictions? - Weekly Blog # 890
Mike
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