Tribute to Frank Harrison - Weekly Blog # 535

We have lost our very good friend and the first editor of these blogs, Frank Harrison. He suddenly passed on to a place of less pain on Saturday night, July 21st. In the last week of his too short life he contributed to blog 533. At the request of his husband and partner of 40 years Mr. Maurice Lane, we delayed this announcement to his many friends and admirers.

Frank was an essential part of our old firm, Lipper Analytical. As our Chief Operating Officer he made things work for our valued clients and colleagues. Early in his career he was a school teacher for disadvantaged children in Newark, New Jersey. He used the same deep concern and patience with all our people. Frank played an important role in establishing our offices in Summit, NJ; London, England; and Hong Kong, where he developed lasting friendships. He also played a critical role in our original office in New York City and our data center and main product office in Denver. In many ways I either didn't know or fully appreciate how much he made my job in managing the firm easier and better. While he was working in NYC during the week he was commuting back to Massachusetts on the weekends. That became too arduous and feeling we could do without him, he found employment closer to what was now his home state of Massachusetts. We never could replace him.

About ten years after I sold the operating assets of the firm to Reuters, I started to write this weekly blog and asked Frank to edit and operationally manage it. He did a great job for ten years, both in his new "part-time" role and his former role as Chief Operations Officer. He was an excellent media ambassador for us, both domestically and overseas.

With Frank's wide circle of friends and admirers here in the US and overseas, my wife Ruth and I would like to celebrate his life and accomplishments. As Frank liked a party, we are planning one in his honor at the Princeton Club in New York, sometime in the early fall. If you and others that share our high regard for Frank would like details of the party, please email me at aml@lipperadvising.com.

Link to Frank's obituary https://www.currentobituary.com/obit/222721

As Frank would have wanted us to do, we must now turn to the primary mission of these blogs, which is to share various thoughts as inputs to our subscribers’ thinking as they address their investment responsibilities. I will share a few of the questions in my mind.


Thoughts to Ponder

1. Most people are focused on the economic (trade, non-trade barriers, taxes and currencies) plus defense positioning between China and the US. They may not have noticed that perhaps the real immediate battlefield is Europe, particularly with its alignment with Japan. As trade may become more restrictive between China and the US, there will be a shift to increase trade with Europe. As is often the case with increases in trade, it will be disruptive to the local market because some of the import prices will substantially impact locally produced goods and services. It is quite possible that the ensuing negotiated prices and arrangements will evolve into a framework for a series of agreements between the trade war belligerents. This may take some time and thus a series of quick agreements before the US mid-term elections may not be in the cards.

Those that have to agree to trade agreements are managed quite differently e.g. command/control, multi-decision power groups ( i.e. legislatures), and multi-national business and consumer parties (supply chains and marketing/distribution channels). In the end these commercial interests will determine the depth and quality of execution. These are big picture questions.

2. Because of what we buy and use we have become unwilling, multi-national participants. As an individual how do you protect yourself from the decisions that will be made above “one’s paygrade”. How do you profit? What preparation is needed for your children and grandchildren’s generation?


3. What are the penalties of downside and upside expansion of risk assets in your portfolio? I suggest that the penalty for the downside is withdrawing from planned future equity investments and the penalty on the upside is taking on more risk assets.

4. Will technology continue to be a disruptive and deflationary force through much lower prices?

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The 3 Cs Dangers – Weekly Blog #534

Consultants, Career Risks, and Cash can hurt professional money managers as well as many individual investors who think like “the Pros”

Consultants
A recent Financial Times column by John Authers starts off by recognizing that it is hard, but necessary, to accept the responsibility for mistakes. It is the reason that many investment committees and other fiduciaries hire consultants. The column goes on to describe the results of a ten year study of consultants’ manager selection recommendations. The academic study found that the recommendations underperformed the market and were worse than the performance of the managers that were not recommended. This was also true in the selection of allocations to various sectors. However, the recommended managers’ performance hugged the benchmark better. (Perhaps the consultants recommended closet indexers.) I suspect the buyers of the consultants’ services expected those results. They knew the value of the John Maynard Keynes quote “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” In another quote from Farnam Street discussing Howard Marks’ book, The Most Important Thing, “first-order thinkers look for things that are simple, easy, and defendable.” Howard makes the distinction between first-order and second-order thinkers. First-order thinkers are only interested in the current time period, whereas second-order thinkers are focused on how the present sets up a number of future scenarios.

Disguised Consultants
Many of today’s investment advisers were impacted by the changing economics in the financial community, from being a fixed fee adviser or a commission driven broker to becoming a registered investment adviser charging a management fee. Since many investment advisors have no rigorous training in securities analysis, they focus their client bets on sectors and factors, using statistical measures, current news, and trends. As with manger selection, consultants are often first-order thinkers and produce similarly unappealing results.  One tip off as to their performance is the weekly data from my old firm’s publication of the Lipper Performance Report. During the latest week, all twenty categories of US Diversified Equity funds showed positive results, comprising the management of $8 Trillion in aggregate. In contrast 18 out of the 28 sector equity funds showed losses, comprising only $1 Trillion in aggregate. The difference between the two is that the diversified funds owned some of the best stocks in the sector portfolios and had enough diversification to produce less volatile results.

Nervous Contrarian
With the consultant’s focus on short term results, echoed by a number of investment committees and other insecure fiduciaries, the ability to predict short term market moves is critical (This is not true for long term investors.) The current stock market is being driven much more by changes in sentiment than fundamentals. Most transactions are originating from non-price sensitive transactors and the markets are reacting to changes of sentiment driven by news, fake news, and rumors. To see the rapid changes of sentiment, look in Barron’s for the results of the weekly American Association of Individual Investors (AAII) sample poll shown below:

View Latest Week     2 Weeks Ago   3 Weeks Ago
Bullish                    34.7%                   43.1%                  27.9%
Bearish                   24.9                       29.2                     39.3
Neutral                   40.4                       27.8                     32.6

As a contrarian I get nervous if I find myself betting with the crowd. Thus, if neutral approaches 50% I will be forced to make a decision and not just bet against the bulls or bears. At the moment my short-term inclination is to go to the bearish side and maintain a bullish position for the long term.

Career Risks
The challenge for the professional investor is to play according to the consultants’ rules, or attempt to produce extraordinary performance by being different, which almost guarantees underperformance some of the time.

Is Cash an Asset Class?
Last week I attended a Pershing Conference for Investment Advisers. I was particularly impressed with a discussion that included Rob Sharps, who chairs the growth equity committee at T. Rowe Price and is an important input into their best in class target date funds. (I am biased in the favor of T. Rowe, having known each of their chairman back to Mr. Price himself. We are users of some of their funds both personally and for clients, and also hold a position in our private financial services fund. I took particular note when he said that at the margin they were de-risking for the first time this cycle. In addition, State Street is raising the question of cash, pointing out that the current rates of return on US Treasury Bills are closing in on the Fed’s targeted inflation rate.

Years ago I studied the performance of various mutual funds that raised cash defensively. In major declines only funds that had about 25% of their assets in cash like instruments had a meaningfully smaller decline in the market. The longer term problem with these funds is that do not recommit to the equity market fast enough, so that when the market regains its prior peak they underperform and are meaningfully worse as performers.

Avoiding Poor Recovery Syndrome
There are two ways to avoid the poor recovery syndrome. The first is not to raise a great deal of cash but instead move heavily into low risk stocks that pay good dividends and a have a shareholder base to support liquidity in the stock price. We used to call them warehouse stocks. The classic one was the old AT&T, not the current stock of the same name. The second approach is to replace the portfolio manager with the next generation, a generation not burdened by the knowledge of what won’t work because it didn’t in the past. In recoveries, the combination of new enthusiasm and momentum will be early stage winners. The trick is then to replace the successful youngster with a more rounded manager.

Bottom Line
Be prepared to move away from the crowd, examine defensive tactics, and don’t fall in love with cash.

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A. Michael Lipper, CFA
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Preventing Investment Mistakes - Weekly Blog # 533

Confirmation and Anchoring

Confirmation and anchoring, according to a recent survey, are the two most popular biases of investment advisors. I suspect these are largely the biases of their clients. While these biases tend to drive investors at all levels into the most popular strategies and investments, they imply that the crowd is normally right, or at least it is safer when wrong to go down with a crowded ship than try to swim in lonely waters.


The Favorites

Those that search for popularity did not attend my first class in analysis of securities and people. The class was held on most days, including Saturday, in an open-air setting at various New York racetracks. The most popular horses had the smallest betting odds. These were called the favorites, as if they were like the most popular high school dates. The problem with chasing favorites is that on average they only win between 30 and 40% of the time.

More importantly, when they win, after deducting the portion of the winning pool that went to the track and state taxes, they do not generate sufficient winnings to cover the 60-70% of the time when they lose. (Like many investors, the winners do not recognize that they owe income tax on their winnings.)


Useful Information

Many investors believe that they are smarter or have more useful information than those on the other side of the bet or transaction. They quickly confuse temporary winning with greater mental capabilities. Just as various political leaders, central bankers, and pundits of all types view an errant morsel of information.

A new breed of binary judges is being marketed to investors as factor funds, which ranks and chooses securities by various statistical measures, such as revenues (Fortune), Market Capitalization (Standard & Poor’s and Russell), Earnings Per share Growth, Price/Earnings Ratio, Free Cash Flow, Current Yield, and others. Sometimes single factors are brought together into multi-factor portfolios. The problem with this approach is that if it were that easy various printers of financial statements would be the richest people in the world.

One of the early lessons from the track, security analysis, and topographical maps/photos is that these are given to all who can afford them. The key to more victories is what is missing, often in plain sight but not recorded for publication or correctly understanding the value of a corporation’s inventories, fixed assets, patents, and customers.

There are other occasions when both the buyer and seller are correct or wrong, one being an expected time span in ownership ranging from one moment to almost infinity. Another is completing a portfolio structuring or restructuring. A third might be the value of a shareholders’ vote.


Avoid Arrogance

Thus, to avoid unforced mistakes avoid the arrogance of assuming the party on the other side of the trade is dumb. Make a serious attempt to guess the motivation on the other side. They may know something that might be helpful.

The professors at Caltech believe that what we commonly call thinking is reaching back into our memory banks. There is a growing gap between those that have experienced either a bond bear market, deflation, or even a 1987 style stock market. Therefore, many investors make mistakes that seniors avoid. If you don’t know something it is easy to be arrogant and not look to understand the other-side of a trade.


Cross Winds

One of the big mistakes that far too many investors are guilty of is not examining a large enough set of inputs. Rare insights are often in plain sight but ignored by most. With that thought in mind, the following are some factoids that I saw this week which could impact some short to very long-term investment decisions:


Possible short-term inputs

The top three global market weekly advances were - Nikkei 225 +3.71%, Shanghai Composite +3.06% and S&P BSF Sensex (India) +2.48%. (Asians must believe that they won’t be hurt significantly by the trade politics, or there is massive short covering.)

Somewhat linked to the above is that the next two index risers were the NASDAQ 100 and the S&P 500 Info Tech Index. This was supported by the 18 of the best 25 performing mutual funds for the week, which likely held those types of securities.

Both the S&P500 and NASDAQ Composite were at record price levels this week, but their trailing price/earnings ratios were not higher than year ago readings. (This suggests that higher prices are being driven by reported earnings, not changes in valuation levels.) However, margin debt is continuing to grow at record levels. My guess is that margin debt is supporting speculative holdings of bonds and/or stocks.


Intermediate Term

Over the last year the average Taxable Long-term Bond fund’s total reinvested return was less than the average coupon on the bonds in the portfolio. This suggests that those investors spending their distributions are eroding their capital. To a lesser degree this has been happening for the last five years. Even though nominal inflation has been historically low, on a “real” return basis, they are eating into their spending power and are certainly doing so if they are tax payers.

With the global aging of developed nation populations, the result of longevity expansion and healthcare becoming more extensive, the underfunding of pensions is growing. This does not take into consideration the self-funding that many are or should be doing.

We may have entered into a world where the money cycle is more important than the trade or product cycle. One of the indications of the impact of technology on jobs can be seen in the oil patch, particularly for those involved with fracking. The number of employees used in extraction is flat to declining and the number used in energy service is growing and is larger than those used in extracting. It would be even higher if the service companies could find a sufficient number of truck drivers.


Longer-Term Considerations

In about twenty years, just 8 US states will comprise 49.5% of the expected population. Adding another 8 states raises the total to about 70%. These states are mostly on the east coast, California, Texas, and Colorado, although they are still unlikely to control the US Senate.

Nigeria will replace India as the home of the most poor people. While this is good for India, it suggests that Africa will likely be the home of most conflicts for many years. While I have been suggesting that the bottom performing commodity funds should be looked at for long-term investing, it may require too much patience as commodity players and farmers remind me that commodity cycles typically take 30 years.

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A. Michael Lipper, CFA
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Risks of Diversification - Weekly Blog 532

While many major fortunes have been made through the aggressive devotion to a single investment, most risk aware investors rely on diversification as an important defense mechanism. These investors believe that they are diversified by allocating their portfolio into domestic equities, international equities, domestic and foreign debt, commodities, and cash. I believe that this allocation schedule does not fully take into consideration the risks that we are exposed to as people and investors for ourselves and others.

Three Biggest Risks

The largest single risk is the lack of recognition of the existence of the “unknown unknowns.” Another way to label this is surprise risk. We are regularly surprised, not only by events but also by the long-term significance of the events. The best defense against this primary risk is to array our financial and intellectual assets and liabilities in terms of their flexibility. We should be able to quickly redeploy some of our assets and liabilities. As we get older and have grater responsibilities it gets harder to pivot to new threats and opportunities.

The second biggest risk is the supposed need for a perfect plan for the future. Recognizing surprise risk, we should be able to devote some of our most precious time and investment capital to explore areas that are unknown and probably uncomfortable. In the US Marines we call this recon, short for reconnaissance. (It was Robert E. Lee’s discovery of the sunken road that led to an important victory in the first US war with Mexico. (“From The Halls of Montezuma to the Shores of Tripoli” are the beginnings of The Marine Corps Hymn.)

The perfect investment plan belies the only guaranteed product of investing, humility. When interviewing potential portfolio managers to invest our clients’ money, we want to know about their mistakes. If one has a very short list or none at all it becomes a very short interview. One of the refreshing points in listening to Warren Buffett and Charlie Munger is their frank discussion of their past mistakes. One of Charlie’s biggest compliments of Warren is that he is always learning. Charlie himself is anxious to learn every day, as am I. Being wrong comes with the territory, hopefully it does not have to be repeated, but often it requires multiple lessons to change behavior.

Derived from the first two big risks is a third. The risk of lack of thoughtful assessment can be a hazard to our survival and growth. We learn little from pats on the back and much more from hits to the gut. While the pain of an acknowledged mistake in our thinking is useful, the real reward for making mistakes is the eventual recognition and adoption of new thinking. The more defensive we are, the more difficult it will be to derive the full benefit of our mistakes. Thus, the mistakes will become more expensive and frequent.

Comfort from Popularity Risk

As all humans are insecure, whether they admit it or not, they look for comfort in quick solutions. To cater to our insecurities we are drawn to what others are doing. This is particularly true when we are under great stress. If we believe others are collectively doing something, how can that be a mistake? That is unless one looks at the dissatisfaction of the majority of voters at the end of a politician’s term, or spend pleasant afternoons at the local racetrack where favorites on balance win only 30-40% of the time. More importantly, the winnings are relatively small and do not equal the money bet on the other favorites that did not win.

Currently, one of the big pushes by some investment advisors, particularly those that are addicted to building portfolios of only ETFs, is factor investing. There are many different factor options for investing, from statistical sorting to sector investing. I suggest looking at the latest five year record of the average mutual fund separated by investment objective. The following data is from my old firm, now part of Thomson Reuters:

Investment Objective      Av. Annual Performance     # of Funds
US Diversif. Equity            +  10.71                             8,385
All Equity                                     9.01                            15,116
World Equity                               6.88                              4,456
Mixed Asset                                 6.28                             5,916
Sector Equity                               6.16                              2,275
Domestic LT Fixed Inc        2.38                              4,174
World Income                              1.43                                750

Sector investing is difficult in the long run, but can be narrowly successful. The best sector for the five years ended July 5th 2018 was Global Science/Technology +22.07%. Some of those stocks are also in the US Diversified Equity leader, Large-Cap Growth +15.23%. They are among the most heavily redeemed group of funds as investors complete their risk exposure investing. The critical question is whether performance is the best guide for the next five years. I doubt it. Much more difficult is to guess where the new performance leadership will come from. In the future it may be a good bet that some or all of the seven different commodity fund investment objectives will become leaders. Since commodity cycles are typically long, five years may be too short a period of time.


Investment Instrument Limitation

Not wanting to rely on investment judgment, regulators have limited the options available for investment. For example, many trusts and some mutual funds are not able to invest directly in commodities themselves. Other restrictions require only publicly traded securities or Investment Grade bonds. Most brokerage firms can not act as custodian for the securities traded out of their home country. There are other restrictions too; some caused by limited scope of the investment advisor’s administrative support mechanism. Almost as with the US experiment with the Prohibition of liquor, adventures beyond the walls of limitations become attractive in and of themselves. We sense that the games only a selected few can play are more exciting than the ones we are allowed to play ourselves. For some investors it may be worthwhile to find advisors or banks that can facilitate narrower investment opportunities with some lack of legal support.


Two Personal Limitations

The first limitation is the mind set of the investment advisor who wishes for sound business reasons to keep all accounts invested in the same products and allocations. Some gatekeepers object to great dispersion among a manager’s portfolio. Life would be much easier for the gatekeeper if he or she can be reassured that a new account will look exactly like the others. I am sure that you have visited museums where every picture is the same. I haven’t and don’t want to. Good investors are painters who evolve over time. Clearly, limitations faced by investors is the unwillingness for tax and emotional reasons to accept gains for tax purposes and losses for emotional reasons. Actually, the limitation may be at the advisor level, not wanting to see assets decline for fear of failing to meet tax obligations.

The final set of limitations to diversifying a portfolio broadly are our own biases. Our brains are memory devices and we find comfort in what we know or think we understand. Even with my Caltech trustee exposure I don’t really understand the science behind most biotech ideas and companies. Thus, I don’t own any biotech stocks...directly. I have chosen to use a couple of mutual funds that have medical doctors as part of their portfolio management teams. This is the way I deal with this limitation.


The Final Limitation

We only have so much time left and luckily we don’t know exactly how much. So we hope that we can learn every single day, as do Charlie Munger and Warren Buffett


Noise, Direction, and Premature Action

Liz Ann Sonders of Charles Schwab put out a piece on July 7th entitled “Just Noise or Something More.” She focuses on the ratio of noise to importance. Last week I ventured that nothing of significance would happen on July 6th. While the US and China raised tariffs, I believe these were firecrackers not artillery. The Chinese President surrounds himself with engineers who think long-term, whereas the US President is more comfortable with generals and others that have served in the military. Combine this with the upcoming NATO and Helsinki meetings and the real game is revealed. President Trump is using an imbalance of merchandise trade as a fulcrum to address a weakened US Defense position. The President sees a shift in balance in terms of technology, a sub scale Navy to fight a two ocean war, insufficient troops and the will to defend Europe, the Middle East and African proxy wars. His major strength is that the US is the single most profitable market in the world. He is attempting to force others to give him the room and time to correct for the imbalances. His great trading advantage is to make the US market less profitable. Almost none of these views will be found in the noise of the popular press or through their politicians and therefore may be more right than wrong.

I suspect many of these thoughts and concerns will become clearer by the Fall, although they’ll not necessarily be solved. Barron’s, writing about the trade war, believes that new index highs are unlikely until things become clearer. From a market analysis standpoint we appear to be in a transition. The question is whether we are seeing accumulation by smart investors or distribution of their holdings to less smart investors. I don’t know the answer, but to me the odds are that investing in global equities is not an unusually high risk currently. This might be translated into a cyclical decline in the vicinity of 25%, but not a secular fall of 50% or more. On the basis of those downsides I am looking for opportunities to buy long-term bargains.

Recognizing that I am probably premature, there are two asset classes that should be considered. The first is World Equity Funds.
I am particularly drawn to the list in Barron’s of the poorest performers in the latest quarter. A number of these funds have a history of being good performers. Some of the poor performance is due to the rise of the US dollar relative to other currencies. This is particularly true up to July 3rd in the Yuan. In addition, the Chinese market in local terms has been weak, in spite of its rising long-term prospects. The second asset class that deserves appropriate study is commodities and commodity funds. For the last five years commodity funds are just about the only group to show negative results. Commodity prices move up because of shortages, more so than an increase in demand. While many old commodity players believe they move in twenty year cycles, it is possible that the longevity of their decline will be shortened, with growing demand and the lack of capital expanding capacity.

Questions: What are your reactions to some or all of these controversial views? Please let me know privately.
 
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Value Can Lead – Weekly Blog # 531

A Possible Turning Point

July of 2016 to June of 2018 may have been a turning point. Interest rates started rising to meet commercial demand for loans, even before the political conventions. Three weeks ago we began seeing that tech-led Growth funds were no longer the weekly mutual fund leaders, value is now leading. In a gross oversimplification some people divide equities between growth and value. According to a table in the weekend edition of The Wall Street Journal, looking only at the sectors within the S&P 500, note the following weekly performance:

Utilities               +2.25%

Telecom Serv      +1.18%

Real Estate          +1.06%

Energy                 +1.03%

vs.

Information Tech         -2.19%

Financials                     -1.93%

Consumer Discretion  -1.87%

Health Care                  -1.79%

One could choose to ignore very short-term performance results, which is normally wise. However, a glance at the charts of the three major stock indices might well suggest that there is a potential warning in the near-term data. Both the Dow Jones Industrial Average (DJIA) and the Standard & Poor's 500 (S&P500) are showing reversal patterns and the NASDAQ Composite (NASDAQ) could be as well. Clearly something has changed and this could be labeled sentiment. The American Association of Individual Investors (AAII) conducts a sample survey of its members which can be quite volatile and the sample may not be representative enough. Nevertheless, it is worth noting that in a three week period, bullish responses dropped 37% to 28.4% of the sample and bearish responses rose 88% to a reading of 40.8% of the responses. (The causes for the sentiment shift will be discussed below.)

A Positive for Value

While some may disagree with me, I believe from a low level the increase in interest rates is a positive for those who are looking for value. The search for value is much more difficult than the search for growth in rising revenues and earnings. While many value advocates speak of intrinsic value, what they really mean is what price a knowledgeable buyer for the company would pay. Therefore, value is a derivative of the price of a transaction. Value-oriented investors attempt to arbitrage the difference between the current price and a future expected transaction price. If one believes in the commonality of assets, a similar transaction price for some could establish value or at least be indicative of it.

Rarely have I found complete commonality of individual assets and thus an adjusted price becomes the theoretical price, with the buyer really determining the value. Most buyers want to earn a premium over their cost of capital and therefore higher interest rates drive acquisition prices. Commercial interest rates imply that they have imbedded within them a credit cushion for bad debts particularly for commercial loans as distinct from borrowings by governments. Thus, in late June and early July of 2016, after the end of an undeclared recession started to raise commercial interest rates, buyers could foresee the profitable use of loans. Thus the beginnings of a new expansion started.

Cash Flows

One of the first tasks we learned from Professor David Dodd was to reconstruct financial statements so that they could be used by investors instead of creditors. To me the single most valuable statement for determining value was the Cash Flow statement, which is rarely commented upon by the pundits. Recently, when I looked at one of these documents it became clear to me that the proper reconstruction is dependent very much on the intended use by a potential acquirer of a company. Acquirers could be quick liquidators, passive investors, a buyer of talent, customers, patent seekers, or others desiring excess capacity and unique assets. In some cases the acquirer may want to remove capacity from the market. The following is a brief list of items found on the cash flow statement that should be handled differently depending on the user: depreciation/depletion policies, property, plant and equipment, acquisition or disposals, repurchase of company stock, repayment of debt, and dividends.

As a practical matter value is not only dependent on interest rates, but on the willingness of others to extend credit to businesses and individuals. Currently, we are seeing a surge in the willingness to offer credit, which is a counter-force to the central banks wanting to raise the price of money. I am concerned that the pressure to offer credit may lead to narrower profit margins, resulting in lower than appropriate reserves.

Stability Leads to Instability

At some point this over-extension of credit creates a vulnerability which could create a major distortion of risk and lead to a recession. Right now credit reserves look to be stable; however, please remember a quote from Hyman Minsky, “Stability leads to instability. The more stable things become and the longer they are stable, the more unstable they will be when the crisis hits.” Instability could mark the end of the current phase, making investing for value problematic.

Shifting Sentiments

I have already noted the somewhat dramatic shift in market sentiment. Many will attribute it to the troubled trade discussions. I personally believe the shift away from the tech-driven growth favorites was overdue. At least on a temporary basis, some retrenchment was to be expected in terms of excessively large positions.

In dealing with short–term trade movements it may be worthwhile to focus on July 3^rd and July 6^th.  The first date is another example of the media-political-academic complex wrapping history to their own needs and ignoring the real motivations of the principals. On July 3^rd, 1863 the final day of the Battle of Gettysburg was fought. Robert E. Lee, probably the smartest American general, sacrificed some of his best troops in charges up a hill to breakthrough the Union lines. Most history books state that if he had won the day he would have pivoted and attacked Washington DC, likely resulting in the desired end of the war.

Looking at a map and understanding where the Union’s economic strength lay, as well as what was happening in Vicksburg on the very same date, shows me a different set of plans. If the Confederate forces had broken through in southern Pennsylvania they would not have pivoted, but instead headed north to disrupt the rail and other east-west train traffic. This would have isolated economic parts of the North and could have taken some pressure off the battle of Vicksburg, which was about to fall to Sherman, leading to the destruction of the South’s war making capability on Sherman’s march to the sea.

Bearing in mind another example of the general public being misinformed, we may be seeing a similar mistake in terms of perceptions of the trade/security issues we are now facing. On July 6 the scheduled implementation of the Trump tariffs is meant to happen. To my mind the trade issues are not the real focus of the current US Administration, security is.   

For whatever it is worth I do not expect anything of significance to happen on July 6.

What do you think on the switch to value and the trade and security issues?

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Copyright © 2008 - 2018

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.