Pick Your Bias And Selective Data Will Support

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Summary

Different investment horizons favor different inputs. One can be reassured that I regularly search through lots of data as inputs to making investment decisions. There currently appears to be a tug of war between the inputs that please bulls and bears. We manage money utilizing different investment horizons and what I am seeing may be useful to our readers.

Short-Term Positives:

  1. The "fear index" for short-term trading is slowly falling, currently reading 28 compared to 32 and 36 respectively for the last two weeks. However, it is still elevated compared to last year's 16.
  2. The S&P/Dow Jones roster of global stock market indexes shows 29 of 32 rising.
  3. A list of weekly prices that includes various domestic equity price indicators, commodities, and currencies, shows 79% rising.

Negatives:

  1. Taxable bond fund net sales, while still positive, fell a bit. (This is viewed as a negative indicator, much like the old net odd-lot transactions being right for a while, but wrong at most turning points, often confirming them.)
  2. A relatively low level of overall stock transactions possibly suggests that some traders and investors are starting their low-volume summer vacations. (The absence of high-volume market followers indicates a lack confirmation signals.)

Many active equity Mutual Funds focus only on their long-term investment objectives and are not very sensitive to changes in market direction, or even the direction of flows into or out of their funds. The first quarter, plus a glance at April, was an interesting petri dish. We did a small confidential survey of a limited number of active stock funds in some of our client accounts, which showed the following results:

  1. Half of the funds enjoyed positive net contributions.
  2. Approximately 30% owned 200+ names, 50% had 50-100, and 20% held below 25 names.
  3. Remember, February saw a high point and March a low point for this cycle, but only 20% chose to make dramatic changes to their portfolios. In each case they actively reduced some risky positions, but generally replaced them with the same number of names.
  4. Most of the funds used their existing holdings to allocate new money to and used them as a source for redemption proceeds. Thus, they stayed within their expected portfolio envelopes.

The useful observation from the small survey is that many active funds are worth a premium management fee and should be used as long-term vehicles to meet long-term needs, not short-term instruments to play the market.

Intermediate Term

  1. Many international or global funds view the world from a European perspective, based on the size of the market and value of the assets listed on their stock exchanges. Companies in Europe were the first to become multinational, beginning with their investments in the Americas. Today, Europeans are much more dependent on both their imports and exports with Asia and Africa, than US companies. Thus, when US investors buy into a European multinational they are buying into China, etc.
  2. Over 60% of Asian trade now remains within Asia. From a trading and investment perspective, Asia is becoming as integrated as Europe, without the bother of an overall government. Today, Asian economies are almost fully recovered from the Coronavirus, whereas the US and Europe are not.
  3. The Baltic Dry Cargo Index is rising and is currently slightly less than half of last year's level, which I take as an indicator of the Asian recovery.

Longer-Term - The Major Concern, the "New Normal(s)"

We are handicapped in our thinking by out of date ways of assembling and characterizing our data. For example, we separate governmental activities from services provided, but don't identify total government wages and service revenues buried in goods manufacturing. Thus, much of business and the whole political structure is coming to a gunfight with a rusty knife. The "new normal" will likely force some corrections. Our job as investors is to be a bit early to these changes. As usual, the change agent will be uncomfortable prices.

The first wave of COVID-19 has wiped out many families' cash savings and put many domestic governments, educational institutions, and critical non-profits in jeopardy. In addition, it has added to our unemployment and increased the swelling group of young people looking for jobs. At the other extreme, because of travel restrictions and working from home, some businesses have increased their cash levels. This has also occurred for some wealthy families.

Our political leaders have a long-term view, all the way to early November, and are focused on goods manufacturing employment in a half dozen states. This is where their problem lies, it is not where the bulk of the people are. Local and state governments provide many services to their citizens/voters and I fully expect almost all to institute fees for the services provided, substantially raising them above what they already charge, possibly with a poverty discount. Rainy-day reserves will need to be quickly restored before additional waves of this plague hit. It will likely include a reasonable reserve for future plagues in this overcrowded globe. (It is quite possible, due to neglect or political patronage, that some of these services can be outsourced to more automated and friendlier companies.)

Bottom line, the cost of government will be going up

The average 5-year return for diversified equity mutual funds through Thursday night was 5.13%, with the average domestic and international fixed income fund earning less than 3%. I doubt that most employers are earning much higher on their retirement responsibilities. This suggests they are not earning their cost of capital, regardless of what they say, and is the reason they have not been expanding in the US. Additionally, while many companies already charge for services after the initial sale, many do not, or charge prices that are too low to cover costs.

I expect prices charged by business, like those of government, will rise in the future. Others have doubted this because of the large number of unemployed, but some at the low end will be employed at wages below the cost to automate. Unfortunately, this period of "go to shelter" has exposed many middle management types in the post 40-year age group who were good enough with full employment, but are now no longer needed. These are nice and good people and some will find employment at considerably lower wages, or take on entrepreneurial risks themselves.

There are upsides to these views. First, people at all levels will learn to budget both their time and money. We are already seeing the personal savings rate rising, but this is initially used to pay back debt. Further, while automation will reduce some jobs, technology will create many more as it addresses existing and new problems.

I expect prior to the end of the next Presidential term to see inflation in the 3-7% range and interest rates perhaps 2% higher, with average equity returns 1-2% higher than interest rates. This should be a good long-term return for stocks and stock funds. A predictor of rising inflation is that gold mining stocks are rising but the metal price is flat. The latter is discounting the future value of gold after significant costs.

Working Conclusion:
In each problem there is at least one or more opportunity, if we are smart and flexible. Investors with these capabilities should see opportunities a bit earlier.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.