New Era? - Weekly Blog # 944
Mike Lipper’s Monday Morning Musings
New Era?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Evidence
After an extended period of daily market movements below 1%
per day, the most meaningful stock market index fell -2.64%, with the
technology sector falling much more. The 30-company Philadelphia Semiconductor
Index which produces the critical needs for “AIs” explosive growth fell -10.3%,
while the NASDAQ Composite fell -4.18%. (This is not the first decline for a
new technology driven bull market, which was led by railroads, canals, and
undersea cables in 1873. These stocks traded on exchanges in America, London,
and Vienna. In Vienna the market dropped 45% in one day.) Despite the happy
talk from Washington and various pundits, we have seen continued notices of
layoffs from large, seasoned companies, including by Macy and Saks. In New
Jersey, April unemployment was 4.8% vs 4.3% nationally. (It was just announced
that Exxon and Chevron have changed their state of incorporation from New
Jersey to Texas.) What is more significant to me is the number of bank branches
that are closing. Perhaps more significant is the observable factor that attractive,
wealthy women, are not wearing expensive jewelry while shopping or at
performances.
Midweek, the AAII sample survey showed the market outlook
for the next six months being 36% bullish and 37% bearish. (I suspect that if
the survey was done after Friday’s market, we would have seen a bigger total
for the bears). Interestingly, some stocks that typically don’t attract tech
buyers, like Coca Cola* (+3.46%), Moody’s* (0.49%), and even Apple*, fell less
than the market (-1.25%).
*Owned in managed or personal accounts.
My View
Most analysts and pundits compare stock price performance to
past cycles to determine investment policies, much like telling time with a
stopped clock. Seldom in an investment career does it pay to look for
meaningful structural change. One way to do this is to recognize that old
firmly held beliefs, like a flat earth, keep us from falling into the abyss. Like
Columbus, we should seek to find new riches by going against the popular view, putting
faith in a compass over an orderly world view. Similar to Columbus I may be
wrong, but I will hopefully reward my backers with fabulous wealth by
addressing society’s real problem, far too many unproductive people. Not only are
the young unproductive, but there are also healthy seniors not working for
money or the good of society.
Today’s government employment data shows that there are
sufficient job openings for all the unemployed, although the hirers say they
can’t find enough people to meet their needs. Only 61% of our population are
employed. I translate that to mean they can’t find people with the correct
attitudes and education to meet their needs. This is an indictment of both our
schools and homelife. To solve this problem, they should automate wherever
possible, which can mean using “AI”.
For many years I boarded
a 6 AM train with papers to read, reaching the office at about 7 AM prepared
for my first meeting with colleagues or committee members of the New York
Society of Securities Analysts, the trade association of my profession. I was
not alone, I would meet other analysts outside their offices for a bite of
breakfast, where executive committee members were also having breakfast with their
direct reports or others that were on the way up. (This was not the normal day
that the executive committee officially met, but they were still doing
business.) After a full day working numbers and writing reports, I caught the 6
PM train home. I arrived at close to 7 PM and then spent time with my children
going over how they spent their day. Thus, my workday was 12 hours, with some additional
time spent on the weekend. I probably spent some 70 hours a week fighting my
way up the ladder.
The law calls for a 40-hour week, which does not include
lunch. Today, according to the Department of Labor, the average American works
a little more than 34 hours a week and that time probably includes lunch. If
you listen to the young people of today, they believe in a work/life balance of
at least 50/50. No wonder our productivity grows at around 3%, which appears to
be higher than in China.
“Evidently, when Trump visited Xi Jinping last month, the
Chinese president made a pointed reference to the concept of overstretch. A
concept that was put forward over two millennia ago by the ancient historian
and general, Thucydides. Can China and the US overcome this trap? There is also
the risk of war expenditures becoming greater than the rest of the economy. The
current administration, unlike China, is extremely focused on short-term-announcements
impacting the mid-terms. Strategically however, both the President and Xi
Jinping are aware of the seminal work by Rear Admiral Alfred Thayer Mahon, titled
The Influence of Sea Power Upon History.
See what you can do to increase productivity and put more of
us to work for society. Your help is needed.
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Mike
Lipper's Blog: Warnings Increasing - Weekly Blog # 943
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Lipper's Blog: Rhymes + Future Opportunities - Weekly Blog # 942
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Lipper's Blog: Many Trends Within the Same Market - Weekly Blog # 941
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Warnings Increasing - Weekly Blog # 943
Mike Lipper’s Monday Morning Musings
Warnings Increasing
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Preface
I cannot predict the future, and I believe none can. The
best I can do is use a life-long habit of dealing with chances of what may
happen. In other words, odds are one possibility is more likely than another.
We all hope that the various problems facing the financial
world will be quickly solved to our personal benefit. However, as a trained
analyst I am compelled to increasingly doubt the expressed views found in most
US media and by other pundits which are not completely echoed beyond our
borders. These items came out last week.
Worry List in Chronological Order
- The number of farm bankruptcies rose 40%. (The same thing happened before the depression.)
- The University of Michigan Consumer Confidence Survey
dropped to 93.1 from 93.7.
- Another Fund Management Company is looking to find a new
home - Dimensional Fund Advisors. (I expect there will be others.)
- Perella Weinberg, an investment bank, is laying off 10
partners and 10% of the firm. (More to come?)
- Gary Shelling predicts a 30 % chance of a S&P 500 bear
market in 2026 and a 60-70% chance in 2027.
- Canada has economically contracted for 3 of the past 5 quarters,
falling into a recession. (The US is their largest customer, and our companies
own lots of Canadian companies.)
- Prudential Insurance, Meta Holdings, and Johnson &
Johnson, are compelled to announce layoffs.
- On Friday, the last day of the month, more stocks were sold
on a decline on both the NYSE and
NASDAQ. However, this may be typical selling before the weekend.
- In May only three S&P 500 sectors rose: InfoTech+5.6%, Consumer
Discretionary +0.26%, and Healthcare +0.21%. Eight sectors fell.
- The three forces that led to the market index rising were: Affluent Consumers, “AI” investments, and
Asset Allocation. (Contrary points: Inflation was up more than wages. Other
industries that were similar and didn’t work out: canals, railroads, radio,
airlines, atomic energy, and computers. Bonds were a safe way to beat stocks
and “private debt and equity”)
Warning: Be Careful, Let Others Have Some of your Winners.
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Mike
Lipper's Blog: Rhymes + Future Opportunities - Weekly Blog # 942
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Lipper's Blog: Many Trends Within the Same Market - Weekly Blog # 941
Mike
Lipper's Blog: What Can Go Wrong - Weekly Blog # 940
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Rhymes + Future Opportunities - Weekly Blog # 942
Mike Lipper’s Monday Morning Musings
Rhymes + Future Opportunities
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Truths
From the beginning of human evolution, elders have instructed
the young with real and imagined tales of history. For the most part, the
speakers were survivors or were protected by survivors. The smarter of the
young learned two things, histories tend to repeat, but not exactly. This is
where the rhyming came in. Only the very smartest of the young learned that
there were tales by losers. To continue being a living survivor the truth in
many cases was disguised, as it was more threatening than going into combat. Many
passed on their knowledge of events through playwrights, actors, singers,
producers/directors and students of the past as made-up dramas.
It is too bad that most historical dramas are not taught
with a deep understanding of the politics and economics of the day. Matter of
fact, that is probably how a skilled professor should teach economics. There is
a risk in doing so, as we prefer tales of winning rather than why things
happen. Notice that today major TV programs and theatrical productions are
produced by organizations dependent on others for capital and licenses.
With that as perspective, please look at William
Shakespeare’s Merchant of Venice. By the time he produced the play he was a
favorite of the British Crown. From an economic point of view the play was opposed
to the creation of debt and the timing optionality of repaying debt in
unfortunate times. Now, substitute the crown for the debtor in borrowing large
sums of money for war making purposes.
Does that ring a bell with the current President, who is a
personal user of debt and urges businesses to delay recouping wrongly
structured tariffs? The bigger problem is that most nations are similarly
staying in power by doing somewhat similar things. They are behaving as other
members of society do, e.g. businesses, non-profits (particularly universities
and hospitals), and retail individuals. In business courses we should teach the
proper way to create, manage, and use debt. (I don’t think it is taught at
Wharton, where the President attended, or perhaps he didn’t take the class.)
The Growing Problem
The following are statements from others related to the
problem:
- Barron’s - “Higher bond yields provide competition for
stocks.”
- The CBO predicts a federal budget deficit of 5.8% in 2026
and 6.1% for the entire next decade.
- “JP Morgan looks to reduce exposure to $4 Billion in private
equity-linked loans.”
Longer-Term Opportunities
After the debt problem has been delt with, I look forward to
a favorable period for equity investing. The following are brief comments that
show some hope for gains.
Earlier this year the only mutual funds enjoying substantial
gains were precious metals funds and those invested in “AI”. Currently, performance
leadership has broadened out to industrials, some financials, and some
international stocks traded beyond our borders. Currently, the mutual fund
averages in twenty-five sectors out of one hundred and five are doing better
than the average S&P 500 index fund.
The Financial Times discussed the investment success of
Chris Hohn, a very successful British hedge fund manager. In many ways his
portfolio is like the portfolio Warren Buffett and Charlie Munger put together,
in terms of its concentrated positions. However, Chris Hohn excluded some
industries from his portfolio that Berkshire had used in the past, like banks,
utilities, media, and insurance. Both he and Berkshire Hathaway (*) like
monopolies and duopolies and spend a great deal of time studying the barriers
to entry for the companies.
* Stock owned by personal and investment accounts
One of the largest industries critical to the health of the
world is the healthcare industry, which is selling at its lowest price since
2000. This is a difficult industry for me to directly invest in. Picking the
winner requires a good understanding of what is being developed in their own
and competing laboratories as well as the rules likely to be issued by various
government agencies. The way we participate is by using mutual funds that have appropriately
qualified staff.
One stock we own for the next bull market is Korn Ferry (*),
a leader in employment management. We see it an “ultimate income” play for “AI”
layoffs. It has a medium yield.
* Stock owned by personal and investment accounts
We are looking for more stocks for the next “bull market”.
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Mike
Lipper's Blog: Many Trends Within the Same Market - Weekly Blog # 941
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Lipper's Blog: What Can Go Wrong - Weekly Blog # 940
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Lipper's Blog: This Weekend’s Learning Sources - Weekly Blog # 939
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Many Trends Within the Same Market - Weekly Blog # 941
Mike Lipper’s Monday Morning Musings
Many Trends Within the Same Market
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Preface
The purpose of this preface is to share my long-term
thinking, which in part drives my current investment thinking. There is no
better portfolio manager thinker I have known than Peter Lynch, who produced a
stellar performance record with a large equity mutual fund over the 1977-1990
period. One of his beliefs was “Know what you own, and why you own it.”
One approach to investing is to be index aware or agnostic. My
approach is different in that it recognizes that all security prices are
cyclically dependent due to both the expressed attitude of the individual stocks
for security and to the market in general. My focus is on the client,
recognizing that they often have several perceived competing needs.
For multi-generational accounts, long-term performance volatility
is as important, if not more so, than simple performance, because it can shake people’s
confidence. Volatility multiples focused on by pundits in the press can scare
investors into dumping well thought out positions.
In many cases, accounts that are managed serially by members
of the family have good results, often due to patience and having seen
volatility in the past. There are a handful of globally managed accounts that have
worked reasonably well, which have both low volatility and good long-term
performance.
For future oriented accounts the selection process does not
depend on the present roster of products. New products, or more germane new ways
of filling critical needs can help companies become leaders in their fields.
Apple (*) is one such company, although you should be aware that this approach can
lead to failed products or approaches at times.
* Owned in client and personal accounts.
In today’s markets the primary way to avoid equity losses is
to invest in fixed income securities, which often have higher yields than
current short-term rates due to investing in lower quality or longer maturity bonds.
This approach may lead to unexpected losses from higher interest rates, which might
be discouraging and defeat the very purpose of temporarily getting out of the
stock market, which is to have a buying reserve. I prefer short-term, under
two-year maturities, or in a few cases middle yielding bonds with low
price/earnings ratios. In the latter case, you should be willing to sell these bonds
after a major market decline, even at a loss, to get cash to invest in stocks that
are more growth oriented.
There is risk in the growing amount of debt being undertaken
by governments, companies, and families, because of depleted accident/emergency
reserves. This could lead to a situation we have not seen in 95 years. A
significant change in the structure of the global economy that could take an
extended period to recover from. Moving further in this direction should cause us
to enter a period of reflection, recovery, and renewal. We need to be aware of
the possibility that this structural change might happen.
Now a View of the Current Situation
If you look at what is being reported in the current media,
you might think “the market” has a bullish future. The truth is, during the
latest week on the “Big Board” only 745 stocks, or 26% rose. Even on the on the
more speculative and shorter-lived NASDAQ Composite, just 31% of the stocks
were sold at higher prices.
For those who have been trained to look at bond yields as a predictor
of future stock prices, the average yield of ten high quality bonds picked by
Barron’s rose 15 basis points for the week, while a group of medium quality bonds
only rose 5 basis points. Rising bond yields mean lower bond prices, which is
negative for stock prices.
Two companies I follow are Berkshire Hathaway (*) and
McKinsey. Berkshire reduced the number of stocks in its portfolio while simultaneously
buying its shares at 144% of book value. McKinsey, a privately owned company, preserved
cash by cutting cash dividends and increasing equity distributions to its
partners.
* Owned by managed accounts and personal accounts.
I pay particular attention to the performance of mutual
funds. On a year-to-date basis through Thursday, 38 of 103 fund sector averages
beat the S&P 500 Index Fund average. It has been very difficult to beat the
performance of the S&P 500 Index for the past 10 years. Only 3 sector
averages have accomplished that, and they were all driven by investor
enthusiasm for “AI”.
The same thing happened among the leaders overseas, where a
1/3 of the emerging securities had some activity in “AI”. This was particularly true in Taiwan and South
Korea. AI labels, where the company is headquartered, should be viewed with caution,
as we don’t know what percent of the chips and computers eventually land in the
US.
One final statistic that I follow is the index of industrial
prices put out by ECRI. For the week the index finished at 145.33, up from 142.00
the prior week and 32.58 12 months earlier. Obviously, problems in the Strait of
Hormuz and other supply chain issues played a role in the increase.
Final impression
All investments
appear to have increased risks. So please be careful.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: What Can Go Wrong - Weekly Blog # 940
Mike
Lipper's Blog: This Weekend’s Learning Sources - Weekly Blog # 939
Mike
Lipper's Blog: Watch Out for the Four - Weekly Blog # 938
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What Can Go Wrong - Weekly Blog # 940
Mike Lipper’s Monday Morning Musings
What Can Go Wrong
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Preface
In preparing to start a buying program using one of the
lessons from betting at the track you should recognize what could go wrong. The
purpose of this blog is not to permit betting, but to avoid wagering on one’s
ego and failing to learn from the experience.
There are four general reasons for not seeing an opportunity
as a trap.
- Not
appreciating the goals of the source.
- Inaccurate
data or badly displayed data.
- Failing
to process past mistakes.
- Too difficult to fathom. (Probably the least in terms of
occurrence)
Tocqueville, as quoted by Goldman Sachs who deals well with
errors. “The greatness of America lies not being more enlightened than any
other nation, but rather her ability to repair her faults.” Therefore, I view betting
on horses, securities, politics, people, and many other things, as learning
experiences.
Sources of Mistakes
We all have deeply felt biases. The media and their chorus
of pundits use information to motivate repeat use of their work. Thus, they
transmit their pronouncements in the way we would like to read, see, or hear.
For example, in the latest announcements of the number of people hired, it was
better than many expected compared to the prior, shorter month, with bad
weather. Deep in the article was the fact that it was not better than the same
month last year. Furthermore, if you deduct healthcare and social assistance
workers from the total employed, there has been no growth since 2024. Why is
this important? The latter group receives payments from the federal government,
either directly or indirectly, which will likely have some impact on the midterm
elections.
This is probably a major reason for the various market
indices going up. Using the data for this week only, 2/3rds of the stocks
advanced and 1/3rd did not. Even on Friday, there was little focus on the
number of new unemployment claims, which rose for the week. There was little
coverage of the consumer sentiment survey by the University of Michigan, which hit
a new low.
When companies release layoff numbers, they are vague and
rounded. What disturbs me is that these are some of the most numeric-driven companies:
Fidelity, Deloitte, and Commerzbank, all of which announced cutbacks. For some time,
established financial and auditing firms around the world have been retiring
senior people without hiring replacements. Even some “AI” people have been let
go.
One of the most dangerous items of news is a shortage of an
industry’s goods followed by a new large supply becoming available. Historically,
look at what happened to the price of gold when the size of the Latin American
precious metal was announced. While it made Spain wealthy, it hurt the other
European nations with lots of gold in their vaults. So be careful if quantities
jump up while simultaneously being withdrawn.
What We Should Have Learned?
Perhaps we should have learned from recorded history the
need to negotiate debts payments, date, and rate! Examples include the
Babylonians, William Shakespeare’s “Merchant of Venus”, the expansion and
depression of the 1920s and 1930s, or even the present occupant of the White
House.
Almost every sector in the commercial world has added debt
as their currency for expansion. This is one reason to keep an eye on the
slowdown in ROTCE (Return on Total Capital Employed). Bearing in mind that this
sum does not cover accidents and supply chain issues adequately.
Please let me know what you think I can learn.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: This Weekend’s Learning Sources - Weekly Blog # 939
Mike
Lipper's Blog: Watch Out for the Four - Weekly Blog # 938
Mike
Lipper's Blog: Investors’ Interlude - Weekly Blog # 937
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