Sunday, November 27, 2016

Short & Long Term Gifts to Investors


Traditionally in many societies there is a festival to give thanks for the harvest. At this Thanksgiving I find a lot to be thankful about as an investor and portfolio manager. While I personally have a lot to be thankful for, I am going to focus on the gifts that we can share with all investors. As regular readers have learned, I tend to look for investment clues to various future timespans. My comments will be arranged with the most current inputs first extending out to longer timespans.

The Richest Market

At the moment the US has the richest and most profitable market in the world for most goods and services, which means we can benefit not only from what we produce, but also what was produced elsewhere at relatively reasonable competitive prices. Thus, the celebration of "Black Friday," a market shopping holiday, but not an official government holiday, is an important event to be observed, literally. Each year my wife Ruth and I visit The Mall at Short Hills, one of the glitziest malls in the US. For many years we have visited there either on the official Black Friday or the next day if we think we can find a parking place. The following is a brief report on our visit that a number of our long-term readers expect.

We could quickly authenticate the belief that shopping online would seriously eat into the shopping at stores. While considerably more crowded than normal, we were able to find a parking space in six minutes versus under a minute normally. As trained people watchers, we quickly noted that there were more people than shopping bags greeting us in the mall. For the most part shoppers came in pairs or larger groups with one an active shopper and the other either an approver or a payer.  While there were a number of men in the mall the prime shoppers appeared to be women, often in groups that were intergenerational - from pushers of strollers to some using canes along with posses of high school and college age young women. A number of these wore full makeup and were dressed as "fashionistas." The younger women crowded into Aritzia, a shop that my Granddaughter works for as a "style advisor." From an investor’s perspective these purchasers were showing signs of optimism as they are getting ready for a better near-term future. (I don't know whether they have been infected by the Trump Stock Market or this was just youthful exuberance.)  Macy's reported that their website had to shutdown three times during the day due to volume of visits.

We saw no signs of major door breakers of very large discounts, even though we did see signs of 30-50% discounts. With the exception of Apple* cell phones we were not aware of any “must have” products that people, particularly men, must have. The Apple store was extremely crowded but not outside lines. It was well staffed and apparently productive. The Verizon store was less busy but a good crowd. The AT&T store had very few customers in a large store.
* I own shares in Apple.

From an intermediate term investor standpoint, I am wondering whether we should be looking at cell phones as a product or as an entry point to services revenues? In many ways one uses the device to deal with the service sector. (For those who are interested I would be happy to discuss my view that Apple is eventually a service company.)  There may be a much more important clue here.

In reviewing economic statistics from many developed countries, service revenues and the number of employees are growing faster than those involved with manufacturing. I wonder whether we have entered a post manufacturing world, where manufacturing's function is to produce entry points to services; e.g., cars will be needed for Uber drivers and users not for personal ownership. If this is half right, the political implications are mammoth. The out of work workers and miners may not get their old jobs back regardless of long-term trade deals, unless we enter into large scale military wars. In the absence of manufacturing and mining jobs; infrastructure, education, and healthcare will need qualified labor. This will be difficult but not impossible to achieve. (If domestic labor does not fill these needs, immigrants will.) A lot will depend on the individual, some will see themselves as individually empowered and will create their own opportunities. Others will hope that as a group there will be a solution to their problems and may be disappointed.

Other Thanksgiving Gifts

The next thing most likely will be seen as a threat, but I view as a potential opportunity. We have been indoctrinated to believe China has replaced Japan as the second largest economy. On a purchasing power basis it is actually bigger than the US. In many ways this is a plus. The US is no longer the main growth engine for the world. Even though it is being guarded as a fortress, the potential Chinese market is large and under-served. The challenge for the new US Administration in the long run is not protecting our domestic market but opening up the Chinese domestic market as it grows. This will not be easy as both of us will be facing financial problems over the next four or five years. The odds favor that we will have our own economic recession, which may be independent of a stock market decline. China is a central command and controlled  economy which is becoming more free with the rising power of local government and the private sector. This transition will be halting and difficult. The true strength of our economies will be measured as we go through the coming problems.

Water as a Gift

Over the lives of our children and certainly our grandchildren it is quite possible that quantities of potable water will be more valuable than oil as our world evolves. Unless we change our dietary patterns our growing populations will consume more and more waters through the food we consume. At some point oil for transportation will be less important as we are going to be living closer together and will be using more fuel efficient vehicles. In a geopolitical sense we used to think that we in the US were blessed by having only two land borders, even though we have gone to war with those to our north and south. In the world that is evolving, our actual benefit is that we are abounded by the Atlantic, and Pacific Oceans and the Caribbean. Through the technology developed by a company now part of GE, we have developed the ability to desalinate large quantities of salt water if we can get enough electrical power. I am convinced that both the cost of electricity will decline and the price of water will rise so the North American countries will be well supplied with water.

Question of the week: Can you employ any of these ideas from this Thanksgiving message to your portfolio, life, or political beliefs?

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