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. - Disclosure rules have changed.
- Corporate executives meet investors
and analysts in tightly scripted conferences or small meetings.
- 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
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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Lipper's Blog: Alternative Futures - Weekly Blog # 827
Mike Lipper's Blog: Bullish Chatter
Leaves Out Useful Info - Weekly Blog # 826
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Different - Weekly Blog # 825
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© 2008 – 2023
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Lipper, CFA
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rights reserved.
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author for limited redistribution permission.
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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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.
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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
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All rights reserved.
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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:
- 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.
- Berkshire has been a net seller for
the last four quarters, including two stocks that we own, BYD and Apple.
- 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
Did someone forward you
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Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 – 2023
Michael Lipper, CFA
All rights reserved.
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? - The DJ
Transportation Index chart looks toppy.
- 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.)
- 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.)
- 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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last week? Click here to read.
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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Copyright © 2008 – 2023
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