Sunday, March 24, 2024

Fragments Prior to Fragmentation - Blog 829

 

      


Mike Lipper’s Monday Morning Musings

 

Fragments Prior to Fragmentation

 

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

   

 

 

Historic + Military Learning

Some have said, if you scratch a good security analyst a historian will bleed. If you add in two other variables, learning from military training and exposure to the racetrack, you will understand much of my thinking. In fearing World War III, one should start with the German General Staff study of the American Civil War and the Peace efforts prior to and post WWI. Long periods of relative peace can be achieved most of the time if intelligent leaders continue to plan for economic and military hostilities.

 

Since we don’t know what the future will bring, we should study every fragment of information available and track developments that might lead to dangerous conflicts. Few peacetime leaders are equipped to be successful war leaders, and often they make war inevitable. I believe a lesson from one of the various “war colleges” is that war is another way to conduct political change. Our political leaders increasingly use an “anything goes" approach to cling to power, ignoring the vulnerabilities they are exposing for our adversaries to exploit.   

 

In retrospect, it has become increasingly clear that WWI and WWII were inevitable. The threat of nuclear war and some of our world leadership has held off WWIII, hopefully forever. Due to improvement in tactical nuclear and other weapons, there is greater risk today than in the past. We need to review all fragments as they appear and be watchful of those which could harm us.

 

Dangerous Fragments Past & Present

In the 1920s, the general urban population looked askance at criminal controlled bootlegging but enjoyed the local speakeasies. Today’s version of this attitude is the general disrespect for most members of Congress. Although they continue to support their local representatives, or for the younger set, the local ‘pusher”. We seem reluctant to reform our own process of offering debt forgiveness in the hope of gaining votes. They don’t seem to see these stimulants as bribes, much like the circuses that led to the fall of the Roman empire.  

 

Daily Stock Markets React to Central Banks Words

On Thursday, 27 % of the “Big Board” stocks declined, with 38% falling on the NASDAQ. The next day, 64% of NYSE issues fell, with 63% falling on the NASDAQ. The only difference was many traders finally believed the clues given regarding the possible number of interest rate cuts this year. (They paid no attention to the view that the next rate move by the Fed could be up.) Most of the time investors stay focused on their long-term needs and don’t react to politicians and pundits.

 

Fragmentation Becoming More Popular

On many days more stocks go up than down. This week, 21 of the 28 foreign markets Barron’s tracks rose. However, in the US only the momentum index has gained double digits over the last two months.

 

What is the Remaining Upside Left?

While it is popular for market leaders to mention their gains from the  bottom, the payoff for today’s investor is what is left? Jeremy Grantham, Chair of GMO, has generally held a bearish view but has generated good long-term performance for the funds he supervises. He mentions that if one uses the Shiller P/E, the market is in the top 1% of its history. A more significant observation is that many analysts use both P/E and profit margin, which are linked, so they are double counting. (Profits = Earnings, which is the driver of margins)

 

Today’s Parallels with WWI And WWII

Russia is in fighting a war in Eastern Europe, with Western Europe supporting the locals. The US is in a trade war with China and is constraining trade. Our opposition is getting stronger, although we are having trouble convincing people that they need to fight. This reluctance exposes our current weakness to our adversaries, giving them reason to cheer.

 

The markets generally seem to be ignoring the geopolitical hot spots accumulating around the world. There seems to be a perception that we can ignore these problems as they are occurring in some distant land. However, these problems are now surfacing closer to home and their citizens are increasingly arriving at our borders and making their way into the country. The situation is putting significant strain on resources and budgets, at a time when pet projects are already being funded in the hope of attracting the support of an expectant electorate. This spending is unsustainable in the long-term and creates additional vulnerabilities for our adversaries to exploit.  

 

 

 

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Sunday, March 17, 2024

Collateral Rewards, Risks, & Opportunities - Weekly Blog # 828

 

      


Mike Lipper’s Monday Morning Musings

 

Collateral Rewards, Risks, & Opportunities

 

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

   

 

 

Motivations

The attempt to be successful and original is hard work, as being an originator seldom leads to investment success. Better results come from striving to be an early participant in an investment idea. Great individual analysts search for a single great idea, usually an idea that few if any recognize.

 

Somewhat later and perhaps deservedly less successful are those who are early recognizers of those with great investment ideas or themes. The second group are collateral players, including public and private pundits working to identify these opportunities.

 

At one point in my professional life, I was a candidate for the first group. I devoted some of my time as an analyst to visiting plants, doing walking tours of workspaces, and attending industry sales presentations or government conferences. In order to accomplish these tasks, I often commuted on the earliest and latest trains. In addition, I also read numerous trade journals, which I no longer do.

 

Today, my “remote” research consists of reading or watching business communications, visiting buyside managers and their analysts, and walking through shopping streets and malls. In effect, my first glance at new products and services is when they are introduced to the buying public, so I am going to be late in recognizing new trends. The only offset I have is my prior experience, having seen many things in the past which may have some bearing on present and possibly future trends.

 

What Are Most Missing

Much has changed in the sixty plus years I have been watching.

  1. Disclosure rules have changed.
  2. Corporate executives meet investors and analysts in tightly scripted conferences or small meetings.
  3. The published data is largely statistical in nature and is focused on the immediate past. Much time is spent on complaints about government restrictions and disclosure requirements. Two examples are the focus on demographics and worker counts. (This is the same trap political pools fall into.) A much more expensive and insightful source of useful information is psychographics, rather the demographics. While two workers may have the exact same job classification, one might be solely concerned about wages and hours while the other seeks career opportunities well beyond the current paycheck.

 

Questions Need to be Asked?

  • What are the implications for the four largest net free cash flow producing companies, which reported over $50 billion each? This suggests to me that risk-taking finance and technology companies will be central to funding the future and could be its beneficiaries.

Net Free
Cash Flow
$ Billion

Goldman Sachs           $143 
JP Morgan Chase           87
Apple                     85
Google                    69


  • The American Association of Individual Investors (AAII) is often viewed as a contrary indicator at turning points and last week the indicator switched direction. Those with a bullish outlook rose to 30.4% from the prior week’s 23.4%, while those who felt bearish fell to 41.4% from 53.7%. (The size of the switch and timing is unusual.)

  • Lessons from the past for possible use in the future? In the 1930s the US shrunk its defense strength below its WWI level, while restricting oil exports from American companies to Japan. It also refused to permit the offloading of a ship of European refugees. (These actions were taken by FDR, whose portrait is the most prominent in the current White House. It hangs in the room where the President meets with current world leaders and US politicians.) 

 

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Mike Lipper's Blog: Alternative Futures - Weekly Blog # 827

Mike Lipper's Blog: Bullish Chatter Leaves Out Useful Info - Weekly Blog # 826

Mike Lipper's Blog: Caution: This Time Is Different - Weekly Blog # 825

 

 

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Sunday, March 10, 2024

Alternative Futures - Weekly Blog # 827

 

      


Mike Lipper’s Monday Morning Musings

 

Alternative Futures

 

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

   

 

       

Could the Future be Better?

While most stock indices are rising, most bond indices are falling.  Normally, fixed income investors are more risk aware than future oriented stock buyers and owners. Some near-term economic indices are rising, while public company managers are laying workers off. (Each worker is an investment of the company, which represents a reinvestment cost if eventually replaced.) Why is this happening when current sales are reasonably acceptable? To many businesspeople, their next planning period look bleak, despite what many political leaders say.

 

The current President is rushing into the 1930s FDR future. This has been magnified by an employment shortage in the prior engine of world trade growth, China. The general assumption in the US is that the current leadership won’t change.

 

 Will it be a Presidential election or one determining the leadership of the two Houses of Congress? According to Nikki Haley, 70% of voters are unhappy with the current candidates likely to lead their tickets. On day one in their next office, they will both be lame ducks. The Presidential term is 4 years, whereas the senate term is 6 years, and they often serve more than a single term. There is considerable evidence that a significant number of voters will decide to stay home on election day. Within each party the centrists tend to be the people not expected to vote. This will magnify the voting power of fringe voters. This was the reason the “State of the Union” speech was directed at tarnishing the other party, rather than at lauding the accomplishments of the party in power. (If this creates a “Nixon moment in the White House it could lead to both leading candidates being replaced. Kim Strassel of The Wall Street Journal said, “Both presumptive presidential nominees are so weak that they’d lose to virtually anyone else”)


Perhaps more important to the world is the statement by Xi, the paramount, but not sole leader of China. He is advocating “High Quality Development” = National Security, Political Stability, and Social Equality. With 90% of the population in the private sector, the level of employment is critical for stability. (China has a history of rebellions starting in the south, with some succeeding in changing the government. Their military posture is more defensive than offensive. However, their defense budget increased 7.2%, which does not include the 30-35% spending on science and space.

 

Other Items of Significance

  • Fidelity International announced a layoff of 9% of its global workforce.
  • AAII sample survey shows 51.7% bulls vs 21.8% bears, which is an extreme contrarian reading.

  

 

 

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Mike Lipper's Blog: Bullish Chatter Leaves Out Useful Info - Weekly Blog # 826

Mike Lipper's Blog: Caution: This Time Is Different - Weekly Blog # 825

Mike Lipper's Blog: What Moves the Stock Market? - Weekly Blog # 824

 

 

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Sunday, March 3, 2024

Bullish Chatter Leaves Out Useful Info - Weekly Blog # 826

 

      


Mike Lipper’s Monday Morning Musings

 

Bullish Chatter Leaves Out Useful Info

 

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

   

 

       

Public Service Announcement

Assuming you have been unable to avoid the bullish chatter from various media pundits and investment organizations, I will not repeat the positives on investments. Instead, I will file a “minority report” of little-known negative factoids to give some balance to your thought processes.

 

Layoffs Continue

Most publicized layoffs are from durable goods producing companies. It is the service providers that really drive the US economy, contributing over 70% to GDP when the service functions of manufacturers are included. When service companies encounter economic difficulties, they tend to cut back gradually rather than in lump sums. They are also less unionized and tend to provide fewer announcements. I therefore tend to pay more attention to the layoffs of service companies. That is why when Expedia announced this week that it is reducing its workforce by 9% it is worth paying attention. It is probably the tip of the iceberg above the waterline.

 

Rare Counter News

The senior strategist for JP Morgan Chase suggests we are in a period of Stagflation (slowly rising prices and wages). The clue to this analysis is the most prominent portrait in the White House main room where the current President meets foreign dignitaries and congressional leaders. It is no accident; the current White House occupant’s favorite President was FDR. In the second half of his term which converted a cyclical recession into a period of stagflation.

 

When the Public are Invited into what was Formerly Private, Beware!

Private lending has historically been conducted exclusively between a single borrower and a small number of financial institutions; all without the “benefit” of government review. Some financial firms are now offering pieces of private credit to the “unwashed” public. It is not only because some members of the public have accumulated cash, but also possibly due to federally sponsored inflation. Some believe there is now more risk in private credit than in the past.

 

Speculators are Buying More Than Institutions

In the latest week, 39% of the shares traded on the NYSE were at rising prices, with 60% on the NASDAQ going up. I suspect there was more institutional volume on the “Big Board”, with some having a longer-term outlook than the public or their advisers.

 

Be Careful of Labels

Many market prognosticators currently worry about the size of the gains chalked up by large “growth” companies, advocating for a switch to small caps. As someone who has invested in both individual small caps and more significantly in funds invested in smaller caps, I am concerned that the data used to support their long-term desirability is faulty.

 

Compared to larger stocks there is a problem with the data due to survivor bias, both for the winners and losers. Some wonderful or seemingly wonderful companies have had their history cut short by being acquired. At times, some of these companies are sought after because of apparently superior products, leadership, or customer base.

 

The sellers believe that the price paid compensates them for giving up some of their potential gains, but it also assumes it reduces their business and personal risks. Many performance histories capture their partial performance for the extended period in the published record, as the history of bankrupt companies is kept in the small-cap record. Additionally, the significance of the bankruptcy record is diminished due to their prices typically being much smaller than most acquired companies.

 

This data concern should not rule out investing in small-caps, although it suggests small-caps are neither a plus nor a minus for selection. Similarly, college selection should not be based solely on first grade class ranking.

 

Stock Selection vs. Portfolio Management

There are many ways to win or lose a football or baseball game. Some variables deal with the play of a particular contest, while others must consider the season, player development, audience development, funding needs, and the career progress of key individuals. Sounds complex!

 

A similar set of puzzles are used to solve the issues of stock selection and portfolio management. In this country, a large portion of the population has an opinion on how the game should have been played, at least for the audience. Predictability improves as one lengthens the time from a single game to a season. For companies, factors like the number of years, loyalty development, and careers might be important. In the fullness of time the last two periods are the long-term payoffs for the real winners, who are small in number but rich in experience and profits. For the most part, success can only be achieved through experience. There is very little written about how to achieve success.

 

Turning to successful long-term investing, the same complexities exist.  These are the problems I face in my life work. Producing these weekly blogs is one way I hope to think through the issues. Unlike some great investors, I limit my focus to individual equities and funds, excluding fixed income, commodities, and critical sources not in English.

 

You Can Help by Sharing Your Experiences, Particularly When You Believe I Am Wrong. 

 

 

 

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

Mike Lipper's Blog: Caution: This Time Is Different - Weekly Blog # 825

Mike Lipper's Blog: What Moves the Stock Market? - Weekly Blog # 824

Mike Lipper's Blog: Picking Winners/Avoiding Losers - Weekly Blog # 823

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

Sunday, February 25, 2024

Caution: This Time Is Different - Weekly Blog # 825

 

      


Mike Lipper’s Monday Morning Musings

 

Caution: This Time Is Different


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

   

 

       

Warning

The standard excuse for breaking the historic pattern of following precedent is the current situation being fundamentally different than the past. The break in historic pattern makes it appropriate to not copy the past pattern of each substantial rise and decline.

 

The problem with the old pattern is that it is two dimensional. If it is going up, it will next go down. However, the next driving direction may be diagonal or a collection of reversing diagonal moves.

 

Worst News for The Leadership

One or more diagonals will upset political leadership, leaders of business, military, non-profits, education, and others in a position of responsiveness. One example is the CEO of Walmart, the largest retailer in the world. He noted that in the general merchandize category the US was in a deflationary price trend. However, in the grocery category the prices of some items like eggs, apples, asparagus, blackberries, paper goods, and cleaning supply were simultaneously rising. (The first four items are classic supply and demand oriented. The last two have significant manufacturing cost elements in their cost structure.) Is Walmart suffering from inflation or deflation?

 

There is a third input caused by substitution. Packing fewer items in a smaller package lowers the price but increases the frequency of purchase. Still another substitute would be lowering the quality of goods and services sold, such as producing less powerful batteries for hand-held devices.

 

Consumers and Investors Are the Real Losers

The unsuspecting real losers are consumers, investors, and any on the receiving end of actions served up by organizations relying on classically trained economists. They make these judgements about the quantity of goods and services. (Have you noticed the dexterous taste of meat and other agricultural products due to cost-cutting providers!)

 

There Are Other Numbers that Drive Investment

There are often other reasons companies are acquired. This week it was announced that Capital One, a Virginia Bank with a very large credit card business, is attempting to buy Discover Financial (*), also a very large credit card bank. If permitted, the transaction would create a card processor as large as Mastercard and Visa. This could change the entire credit card and consumer bank businesses.

(*) Owned in personal or managed accounts)

 

On Saturday, Berkshire Hathaway (*) issued its annual report and shareholder letter. (A copy of my internal reaction to the letter is available to our blog subscribers by sending me an email at AML@Lipperadvising.com) The shareholder letter mentioned that their BHE owned utility served the population of ten midwestern and western states. (To the best of my knowledge this is an unrecognized and unused asset which could be of great marketing value in the future. It is the sort of non-balance asset that represents hidden value not tabulated in government records.

 

Another example of a business asset transforming into a financial asset capable of changing the nature of competition in the securities markets surfaced this week. This was captured in the following headline from the Financial Times “S&P Global nears deal for Visible Alpha in effort to compete with Bloomberg.” (Shares in S&P Global are owned in proprietary accounts.) Visible Alpha collects research reports from major Wall Street firms and distributes them electronically. It thus attaches additional value to research, beyond that provided by the originating firm and their direct clients. If the deal goes through the consortium of firms will probably pass the proceeds back to the issuing houses, partially converting an expense item to a capital item.  

 

A “Smart Money” Bet on Market Direction

Regular readers of this blog know that my primary investment academy is the racetrack. Always trying to improve my results I learned to look at what I thought was the “Smart Money” at the track. Applying that principle to investing I see a decline as the next major move, for the following three reasons:

  1. Both the Chairman and President of JP Morgan Chase have recently sold some of their shares. In the case of Jaime Dimon, it is his first recorded sale. Since he bought some shares in the public market, I assume they will represent a portion of what he sells. The President sold some earlier in the year.
  2. Berkshire has been a net seller for the last four quarters, including two stocks that we own, BYD and Apple.
  3. Many industrial/service companies have issued layoff notices and/or have delayed start dates for new recruits. These are significant. My guess, many of these companies have found it difficult to hire the right people over the last couple of years. In many cases, new employees take one or more years for their employers to earn back what they are paid. With a layoff today probably costing future profits well into next year, it is likely a well thought out decision.

 

I consider all of these to be bright people and consequently advocate building up trading reserves. However, I also recommend maintaining significant permanent equity positions, as I could be wrong.    

 

 

 

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

Mike Lipper's Blog: What Moves the Stock Market? - Weekly Blog # 824

Mike Lipper's Blog: Picking Winners/Avoiding Losers - Weekly Blog # 823

Mike Lipper's Blog: Is This “Bull Market” Real? - Weekly Blog # 822

 

 

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Sunday, February 18, 2024

What Moves the Stock Market? - Weekly Blog # 824

 



Mike Lipper’s Monday Morning Musings

 

What Moves the Stock Market?

 

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

   

 

         

Fearful Challenge

A common mistake many people make is confusing the credibility of spiritual leaders and markets pundits. Professional preachers proclaim their belief in what will happen in the fullness of time. Stock market pundits, who are not as bright or skilled as many religious speakers, make the mistake of being more specific about dates and price levels. At best, market prognosticators can occasionally be right about dates and/or prices, but rarely both at the same time.

 

With all their mathematics and computer skills, recorded history suggests the future should be knowable in every instance. While we have great precision as to what happened, we don’t know what caused people to do what they do. Since we don’t rigorously examine our deep emotions for each action, we may not know exactly why we bought or sold something at a particular point in time.

 

Best We Can Do

The best we can do is identify what we think we knew at a particular point in time. Investors currently have a plethora of prices and other indices available to them, but rarely a record of emotions. Furthermore, our decision-making process evolves over time, influenced by current leadership and the ideas of other people.

 

Because we only know or remember the numerical data surrounding our decisions, we attribute our decisions exclusively to numbers. I believe this is why in looking at financial history we tie our decisions exclusively to the known numbers. It is the main reason many of the numbers do not generate good predictions. I would not be surprised that the track record is only 60%-75% accurate. (This falls under the old label of “good enough for government work”.) 

 

Thoughts on the Day of the Decision

There are only about 240 days a year when most investors can execute an order. Most investors probably trade less than once per month, with institutional investors trading less than 8 days per month in their long maturity portfolios. Consequently, most investors are not active most days, with nothing spurring them to action in each portfolio. Additionally, the spur to act may occur on quite a different day than the trade, unless price is the cause. Thus, it is difficult for an outsider to identify the ultimate cause of the action.

 

What Could Have Been the Critical Fact Last Week?

  1. The DJ Transportation Index chart looks toppy.
  2. FT headline “Hedge funds stampede into cocoa futures”. (Hedge funds are trend followers and there is a history of cocoa crashes sending players into highly leveraged coffee plays.)
  3. Morgan Stanley is laying off several hundred from their wealth management division. (This division is the central reason Morgan Stanley is viewed more highly than investment banking and trading driven Goldman Sachs.)
  4. In the chart in the weekend Wall Street Journal of stock indices, commodities, currencies, and ETFs, 65% are declining.

 

Too Narrow a Focus on Inflation

Inflation is caused by an imbalance between supply and demand for an undetermined period of time. It includes the follow elements: supply or demand shocks caused by weather, accidents, government actions like tariffs and other impediments to free and/or easy trade, and partial or complete military mobilizations. (In terms of the current US situation, the federal government is the single largest contributor to inflation, followed by union management pay demands.

 

Calendar Guide

While the calendar year is already more than 10% complete, we probably have not seen the most critical announcements of the year. Considering we have a probable lame duck president, divided political parties and a split Congress, this may be the time to build a higher-than-normal cash reserve to be used to buy some sound investments for the remainder of the decade.

 

What Do You Think?

 

 

 

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Mike Lipper's Blog: Picking Winners/Avoiding Losers - Weekly Blog # 823

Mike Lipper's Blog: Is This “Bull Market” Real? - Weekly Blog # 822

Mike Lipper's Blog: Worth vs Price Historically - Weekly Blog # 821

 

 

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Contact author for limited redistribution permission.