Sunday, March 19, 2017

Six Contributors to Future Performance


Delivering on funding goals is more important than ego satisfaction. 

Investors and their managers want to be winners, or at least feel like winners. That is why there are daily price movements published, which is the same reason that most US race tracks have eight to ten races a day. The one clear observation on both presentations is that it is almost impossible to be a winner in every investment and every wager, every day.

One of the lessons I learned at the track and investing for our clients is to be highly selective as to which contests that I choose to put money into.

My style of both investing and other wagering is to focus on what contests are important to win. This has led to the development of the TIMESPAN L Portfolios® which looks to meet critical payment needs broken into various time periods. With that as a guiding principle, I tend to sort the enormous amount of daily inputs we all are besieged with, by assigning them to different timespans. In that way, the information is put into period-based categories where the information is most useful to aid in achieving goals.

Six Timespan Sorts

What follows is how I sort the flow of information (and perhaps misinformation) into the most useful timespans.

1. Present trading environment-A quick look at the price indices for the three major US stock indices have very similar  patterns. In the recent burst of enthusiasm all three had upward price gaps which lasted for a few weeks. One of the rules of thumb is that eventually all gaps have to be filled by an equal and opposite reaction. This has been done. Soon after filling the gap, upward momentum stalled and now the price patterns appear to be in a top formation. The "bulls" would characterize it as a consolidation awaiting further, hopefully positive, developments. After all there has not been as much as a 1% decline in the value of the S&P500 in any single day since October 11th, 2016. (Barron's has noted that after the last period of 100 days without a single day drop of 1%; was followed a year later, when the index was up +75%.)
2. Current economic picture-While central banks tend to speak in terms of government sourced economic statistics, they are starting to react to the signs coming from the commercial world. Around the world many businesses are getting better with the only short term concerns is finding qualified help. We personally know of US businesses hiring and the apparent replacement of old help wanted ads with new ones at higher initial wages offered. Growth is spa radically  picking up globally selectively in Europe and significantly in Indonesia and Singapore. While not always accurate, The Economist has an article headlined “The global economy enjoys a synchronized upswing.” 

3.  China remains both the short-term and long-term wild card. US Secretary of State Rex Tillerson is in Beijing meeting with his counterpart. This is a ‘getting to know you’ meeting, trying to find areas of future cooperation. Combine this with the speech of Apple's* CEO on Saturday in Beijing and his meetings early next week with the leading political and economic leaders of China, which can further clarify the nature of Chinese progress to becoming an even bigger player on the world stage. While the current government of China has apparently managed its economy best in the world of large nations, a recession or even a major slow down in its growth would be destabilizing to the US and much of the world. This possibility does not appear to be priced into the global stock markets. 

4.  Market leadership and structure changes could be disruptive or opportunities. Charles Schwab* has issued an intelligent study that portrays that the superiority of small caps compared to large market capitalization stocks is going to be reversed due to both market liquidity concerns and valuations. This view could be supported by The Financial Times which reports a study that predicts that one-third of City (UK's Wall Street) analysts will lose their jobs due to regulatory disclosure practices. They note that this could produce more underpriced securities which will tend to be in small to mid caps. We have seen for sometime similar trends within the US which is one of the reasons that US small caps have performed so well as captured in a number of mutual funds. A Quarterly Institutional Review by Dimensional Fund Advisors demonstrates that the superior performance of many small caps comes from value and core funds not small cap growth funds. Our investment funds and portfolios will almost always have different mixes of Large Cap and Small Cap funds.

*Stocks owned either personally or in the private financial services fund I manage

5. The march of what is called “popularism” will probably continue despite this week's Dutch election. While that particular populist party did not come out as the feared leader, it did add to its number of seats while the victorious establishment party lost a much larger number of seats. Despite the sense of relief by the establishment's financial inherent leaders in France, the FT noted in a headline "Financiers lineup to engage with LePen." I speculate that unless the various establishment parties launch new programs that effectively address the levels of dissatisfaction being expressed globally, it is only a matter of time before there will be a political leadership change. (I am not suggesting that those that are not part of the governing bodies will themselves provide solutions, but have the advantage of the old slogan "throw the bums out." 

6. Final Worry-According to my old firm's research, on a global basis  investors have put $1.1 Trillion into Bond funds in the last three years compared with $750 Billion into Money Market funds, $569 Billion into Equity funds and $123 Billion into Mixed Asset funds. At some point with the built-in rise of interest rates and signs of inflation, bond prices will decline and put investors further behind in their needs for retirement capital. The bond market participants include not just slow moving investors, but also trading entities, including ETFs and hedge funds -  some of which borrow heavily against their portfolios. If bond prices collapse due to the lack of market liquidity one could see significant counterparties’ risks which could hurt the stock market regardless of the economic outlook. These counterparties may have to sell their equities at any price to meet their margin-called debts.  


My special Blog Post of March 15, entitled “We Cannot Escape Being Global” discussed the visit of Chinese President Xi Jinping’s to meet President Trump in Palm Beach.  The correct dates of the meetings are April 6 & 7. 

Click here to read my special blog post.
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A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.

Thursday, March 16, 2017

We Cannot Escape Being Global


I think about this blog every day, culminating in my weekly “Monday Morning Musings.”  Very occasionally events occur during the week that I would like to share as soon as possible. 

One of the approaches I use in this Blog is to relate current information to historical context.  This post is an example.  

Our Needs are Global

Almost all of our own economic activities, much of the food we eat and many of our social attitudes are influenced beyond our national borders. The whole concept of ‘national states’ presumed that the bulk of the population had a large number of common interests which were sufficiently different than our neighboring national states that created a specific legal identity. We were different than our neighbors. We choose to have "us" govern our national state which in the past represented our world.

“One World”

This belief is no longer true and matter of fact has not been true regardless of our laws and taxes for a number of generations. When Franklin Delano Roosevelt defeated Wendell Willkie for US President in 1940, he did something that no other  President has ever done before or since. (My late Mother was a political aide to Mr. Willkie.)

FDR sent Willkie around the World to meet with foreign leaders including some that were not presently within their governments as a way to build the critical alliances needed to defeat the Axis. As an outgrowth of this wartime trip came Wendell Willkie's book, "One World" which to a large degree predicted the reality of today’s increasingly close dependency of one national state with others. Almost every major international trend since at least WWII has reinforced these dependencies.

President Xi’s Visit

This week, due to the snow storms in the Northeast US, Ruth's and my return from Florida meetings has been extended due to extensive flight cancellations. In a classic example as to the impact of the broader world on our personal lives, we are staying at a Palm Beach hotel within about a mile of Mar-A-Lago, the unofficial winter White House of President Trump. Traffic and other security measures are strict and will be tightened even further for the April 6 & 7 visit of the leader of China to the US President.

Perhaps by the following Monday the pundits will be declaring who won, lost, or achieved a draw.  My guess is that over time, the pundits’ judgments will be proven at least to be incomplete and probably wrong.  China and the US share many of the same problems: ISIS, aging population, bloated bureaucracies and the re-definition our global roles. At best the two leaders will identify their similarities and differences.  The meeting may be as  important as the meeting at Yalta.

Recognize our Co-Dependence with China

The meeting of the leaders of the two largest economies in the world reinforces to me our co-dependence. China is the world's largest consumer of many traded commodities. These commodities are traded globally with daily fluctuating prices. These prices often represent inflationary pressures that eventually impact producer and consumer price indices that the central banks use in setting their monetary policies. I am particularly conscious of the Chinese impact on technology as it assiduously protects the largest consumer marketplace in the world and is still a major exporter of technological product. The drive of the present government to increase the portion of its internal economy devoted to services has a direct impact on the US as the largest exporter of services.

Investing successfully in China is difficult whether through joint-ventures or publicly traded shares. We are exposed to both in investing international funds and multi-national companies. Luckily we have other exposures, as investing in China has not today produced much in the way of cash dividends and who knows in the way of earnings. Nevertheless, I believe that all investors and many people will be affected by what happens in China. Thus, we need to recognize our co-dependence in thinking about both our portfolios and our lives. 
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A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.

Sunday, March 12, 2017

Managing Opportunity Costs


All who at least tangentially follow the stock market know that at some time in the future stock prices will experience a major decline. I know I am premature, but as a securities analyst, portfolio manager, investor and entrepreneur I need time to position my mind and my emotions.  I want to be prepared intellectually and emotionally to survive the decline and participate in the eventual subsequent rise.

As I have previously written, I believe sentiment or if you prefer the standard phrase, rising animal instincts, have become the driving force for stock prices rather than the various statistical ratios which as professional investors we are comfortable. The two present indicators I follow that demonstrate rising sentiment are, (1) the supposedly retail flows into Exchange Traded Funds (ETFs) and (2) the relative movement of bond yields.

Just at the time that preordained lists of stocks are showing less cohesiveness or if you prefer correlation, media are reporting a significant increase in the use of ETFs by the retail public. Stock prices within various groups are moving differently, thus individual security selection has become more needed for investment success. In the broad market indices the financial and utility sectors are moving not only at different speeds but in some different directions. Within the sectors there is considerable difference in individual stock price moves. For example, within the banking sector until quite recently the prices of many smaller banks have been much stronger than those of the mega banks. The price/earnings ratios on many of the smaller banks is considerably higher than those of their larger peers.

The yields on a list of intermediate credits tracked by Barron's has been flat thus far this year, 4.54% in the first week of the year and 4.57% last week shows relatively stable while there is less demand for a similar list of the highest quality bonds with their yields rising from 3.46% to 3.62% last week. The professionals in the bond market tend to be much quicker than equity people to changes in credit conditions.

First Week of 2017
Last Week
Intermediate Credit
Source: Barron's

Preparing Mentally and Emotionally 

As is often the case, we are our own worst enemies. When stock prices decline we tend to measure the fall either from peak prices or purchase prices. Neither is particularly useful in assisting future investment activities. Both peak prices and purchase prices are historical accidents and don't have any forecasting value.

We should go back to our base case whether we are serving institutional or individual investors. Our goal should be to arrange payments that will cause people to react positively to the intended use of the money. With that in mind, investment success is an intermediate step toward our goal of delivering the needed funding. Whether we succeed or not is the opportunity cost that we pay to have the opportunity to achieve our goals. One can look at high opportunity costs (losses, fees, taxes, and efforts including emotions) as premiums to get the chances of better results.

At the racetrack the objective is to walk away with more money than when we entered. Not only do we count our losing bets against our winners, but we should also include our expenditures. In both the racetrack and investment experience we should add in the time and expenses of our analysis, perhaps deducting something from the continuing value of our analysis. If one bets on favorites with low odds and expected higher probability, that is a grinding-out game. On the other hand if one chooses less popular and higher paying prices, if successful, typically the win/loss ratio will be worse than those of the favorite player. However, at the end of the day one can walk away with more money. For some, the second player (regardless of monetary result) could have more thrills than the winner of expected results. To many these thrills are in and of themselves a gain on the day unlike those experienced by the player who is with the crowd. In many ways the opportunity to achieve these thrills is an opportunity cost worth enduring.

Our problem as professional portfolio managers is to mix both extremes in a specific portfolio for a client's needs to make future payments. We believe that first recognizing the various timespans for future payment aids in identifying the levels of current and future risks which are appropriate for the accounts. Within each of the timespans one can employ the appropriate balance of lower risk and higher risk funds and securities. 

At the end of the day we get our thrills by meeting the payment goals of the account through a satisfactory level of investment success.

Post Script

Ruth and I hope that our readers in the Northeast US find themselves safe and warm during this coming week’s inclement weather.

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

Did someone forward you this Blog?  To receive Mike Lipper’s Blog each Monday, please subscribe using the email or RSS feed buttons in the left column of 

Copyright © 2008 - 2017
A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.