TOO MANY HISTORIC LESSONS - Weekly Blog # 786

 

Mike Lipper’s Monday Morning Musings

TOO MANY HISTORIC LESSONS

 

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

 

 

 

Are we looking in the wrong direction?

The most important task for any analyst is guessing the future direction his/her enterprise should take. The standard approach is to review history. The problem with that approach is most history is written by the surviving winners and told to us by scribes who feel the need to make history interesting, clear-cut, and supportive of the commerce of the payor of the scribe. I have played that role. My problem is that for myself and my accounts the picture is not clear, particularly now.

 

Current Picture

Today’s blog is being written on the Saturday of the weekend before the grand compromise of the US Debt Limit/Tax Expenditure Legislation. We should never have been put in this position! Our elected leaders have had full knowledge of the twin conflicts of debts and expenditures for many months. Hopefully a tactical compromise will be announced within days.

 

There is however a more depressing structural problem facing us. These two problems have been with us ever since our leaders first determined what amount to spend for the perceived benefit of the governed and where to get the money. I am sure there are written Middle and Far Eastern texts, but the first I know of came from the ancient Roman Republic.

 

Rome conquered the known civilized world through the strength of its Roman Legions and superior engineering. The money to accomplish this came from taxing citizens, effectively the free residents of the city of Rome. Citizens elected the Senate who then passed these taxes. These senators had political skills, which they used to get the votes for their leadership. They induced citizens to vote for them by providing “Bread and Circuses”, or in other words food from conquered lands and mass entertainment.  As long as the Senate provided these in sufficient quantity, they remained in power. Upon failing to do so they were replaced by emperors who felt the political need to continue some of the “bribes”.

 

To keep the food supply growing the Empire continued its military conquests, enabling them to award the legionaries the captured farmland which benefitted from the Roman roads and aqueducts. However, the fidelity of the farmers declined over time, as did the quality of their military skills. Consequently, the Empire was overrun by the barbarians.

 

The political lesson for today is that bribery works as long as it continues to increase.

 

There is another lesson, this time from The American Revolution. One of the rallying cries of the colonials was “no taxation without representation”. They got around that issue by placing tariffs (taxes) on imports, and later through the power of inflation reduced the future value of the dollar.

 

In an aging world all governments need to address the increasing requirements of the elderly. China is under pressure to raise the retirement age from 50 for women and 60 for men. We have seen the difficulty France is having in attempting to raise its retirement age by just by two years.

 

Two Different Views

In general, the evolving political views of many Americans parallels their investment views. One group wants the government to be funded by taxes on the “rich” to pay for their growing needs. The second group wants to be able to provide for their families and their needs with their own funds, sharing equitably with those less fortunate.  In most cases the first group believes it will benefit as the economy continues to grow. The second group believes it will be increasingly difficult to create sufficient economic growth to meet everyone’s needs.

 

The second group sees the following signals as anti-growth:

1. Labor productivity is growing less than inflation.
2. Well established investment bankers and law firms are selling out, partially due to the views of the dominant partners.
3. The following financial firms, after studying the issue, are meaningfully reducing the number of staff in tech and operations: Wellington, Capital Group, and JP Morgan.
4. Some Private Equity firms are selling positions at a discount.
5. Consumers have shifted their buying habits from Best Buy to Costco.
6. Shortage of landlords.

 

Search for Conclusions

Please let us know your opinion on whether this is a time to buy risk assets to be sold in one to five years.

 

We close this Memorial Day blog with a quote from Theodore Roosevelt “We must dare to be great; and we must realize that greatness is the fruit of trial and sacrifice and high courage.”

 

 

 

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

Mike Lipper's Blog: Statistics vs. Influences-Analysts vs. AI - Weekly Blog # 785

Mike Lipper's Blog: Insights From a Sleepy Week, Important? - Weekly Blog # 784

Mike Lipper's Blog: My Triple Crown - Weekly Blog # 783

 

 

 

Did someone forward you this blog?

To receive Mike 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.

 

Contact author for limited redistribution permission.

Statistics vs. Influences-Analysts vs. AI - Weekly Blog # 785

 

Mike Lipper’s Monday Morning Musings

Statistics vs. Influences-Analysts vs. AI

 

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

 

 

 

Raw Materials

When my grandfather entered the brokerage business in the early 20^th century there were no named analysts, only statisticians.  I believe the New York Society of Security Analysts (NYSSA) was founded in 1937 as one of the first local luncheon meeting groups. (Many years later I was elected President of this the largest analyst group in the world.)

 

A statistician deals with numbers, usually the limited amount published by companies and perhaps market measurers. Analysts however, as with military and commercial intelligence gathers, guess as to critical non-public information. One of the things I learned in the US Marine Corps was that before undertaking an assignment it is helpful to make a list of Essential Elements of Information (EEI). I was never given enough time to complete the list before moving out to accomplish the mission.

 

Perhaps it is ironic that some of the financial community, through the wonders of search programs on fast computers, are retrogressing to becoming statisticians.

 

The rest of this blog is devoted to possible influences that can lead to investment conclusions not connected by Artificial Intelligence relationships, perhaps because no one has made those connection in written texts. As with EEI, some of the influences do not lead to correct results but should be examined anyway. A wrong connection can prove to be inaccurate, but useful in improving the road to the right solutions. (This is often of great value to Caltech’s later research successes.)

 

Leading to Useful Conclusions

 

Possible US Stock market Direction

1. 83% of 2023’s gains in the S&P 500 thus far come from only 5 stocks.
2. Large market-capitalization stocks now have a preferred position. Year-to-date large-cap mutual funds have on average gained +9.85%, mid-caps +3.28%, and small caps +1.56%.
3. While a greater number of shares on both the NYSE and NASDAQ traded this week at rising prices vs lower prices, there were more stocks going down in price than up in both markets.
4. Do Treasury Bill yields predict inflation averaging 4.29% for the next two years, then dropping to only 3.69% over the next ten years?
5. A number of companies are in the process of meaningful transitions, probably suggesting their past financial statements are not particularly useful in predicting their future earnings power or stock price (Goldman Sachs, T. Rowe Price, and Disney are examples).

 

Where is the US Going?

The future belongs to the youth, as is usually the case. An upbeat hope was expressed for them by David Solomon, CEO of Goldman Sachs, keynote speaker at the NYU Stern School baccalaureate graduation. The brief talk was of interest to me for two reasons. First, it was the commencement for a grand nephew of mine. Second, Goldman Sachs is an investment in my client and personal account portfolios, which have performed well but is going through a difficult period as it restructures. While his comments were directed at the graduates, they also had relevance to Goldman Sachs and those in the investment business.

 

His comments are summarized briefly below:

• Life is a marathon
• Enjoy the hustle
• Good enough, isn’t
• Choose excellence
• Like connecting with people
• Spend time in pursuit of life’s goals
• Work longer
• This generation is going to Mars
• Focus on where to learn

 

A very different view can be gleaned from a survey of young people looking for their first job. The following are characteristics of what they are looking for and the percentage who want it:

• Flexible hours (68%)
• Retirement contributions (34%)
• Mental health benefits (28%)
• Student loan assistance (28%)
• Unlimited time for PTO (27%)
• A 4-day work week (26%).

 

China

1. Household bank accounts = $6.7 Trillion, which is greater than Japan’s GDP.
2. Private companies employ 90% of urban employees.
3. 20% of 16–24-year-olds are looking for jobs
4. The Central Government of China is holding meetings with governments in Central Asia. (The C5 counties of Kazakhstan, Tajikistan, Kyrgyzstan, Turkmenistan, and Uzbekistan. (All former members of the Soviet Union.) These countries are part of the critical rail and truck roads to transport both Chinese products and the natural resources of these countries. However, Chinese suppression of the Muslim Uyghur population in their Xinjiang region could cause problems. I believe the US will be involved with Ukraine for a long time as it is one of the critical players in the Black Sea, which along with the Caspian Sea is the western front for the C5 counties and China.

 

Working Conclusions

Even if you think you are just investing in the US, you are investing globally. Because critical linkages are between people, not texts, we are going to need more and better analysts throughout the world.   

 

 

 

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

Mike Lipper's Blog: Insights From a Sleepy Week, Important? - Weekly Blog # 784

Mike Lipper's Blog: My Triple Crown - Weekly Blog # 783

Mike Lipper's Blog: Fire Drill - Weekly Blog # 782

 

 

 

Did someone forward you this blog?

To receive Mike 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.

 

Contact author for limited redistribution permission.

Insights From a Sleepy Week, Important? - Weekly Blog # 784

 

Mike Lipper’s Monday Morning Musings

Insights From a Sleepy Week, Important?

 

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

 

 

 

Sentries Be on Guard

Both military and investment sentries (analysts and portfolio managers) know that the most dangerous part of their jobs is falling asleep before a major, unexpected change. There is a good chance that on the investment front we are being lulled into not searching for changes.

 

In the last six weeks the S&P 500 has moved under 1% each week. Market analysts call such periods accumulation or distribution, which is when securities move into from weaker into stronger hands. The results of which will become known when the eventual breakout/breakdown occurs.

 

Currently, as is often the case, we are simultaneously experiencing two different markets. For example, the week before last S&P 500 stocks continued to have more distributions than accumulations. Last week on the NYSE there were 6.3 million shares acquired at rising prices and 10.3 million shares acquired at declining prices. This is not surprising as the year-to-date extreme performance spread in the DJIA is quite narrow, from a gain of 4.56% to a loss of -1.33%.  The S&P 500 year-to-date gain of +6.96% could be labeled stagflation. Liz Ann Sounders of Charles Schwab reminds us of two other stagflation periods, 1929-1942 and 2000-2009.

 

At the very same time the year-to-date NASDAQ extreme performance numbers show a range of +19.23% to -0.36%. Advance and decline share volumes are also evenly matched at 10 million shares.

 

Currently, the five largest companies are producing better than average index results in most sectors. Contrast this with the week’s WSJ weekly prices of the 72 security, commodity, and currency measures, where 75% declined. The two worst performers were Comex Silver -6.8% and the South African Rand -4.85%, both hedges against the US dollar.

 

Signs of the Future

In the current market most buyers expect an acceptable year in 2023, and a good one in 2024. Sellers expect to have to wait, at least until after the next presidential election. They are being paid to wait with certificates of deposit yielding around 7%.

 

This week we have seen two estimates for 2024. The 2024 estimate for Social Security COLA is 3.1% (It was 8.7% for 2023). Interestingly, the household survey for 2024 came out with an almost identical 3.2%.

 

Longer-Term

In attempting to predict the longer-term I find it is more useful to rely on recognizing symptoms rather than attempting mathematical projections. The largest contributor to world trade is China, where most high-priced purchases are generated by wealthy young people. Recently, they have cut back materially on their purchases of top-line jewelry. I don’t know if any of these purchases hedge against their own currency in favor of the US dollar. (Due to inflation and out of control government bribes the US dollar should decline on an absolute basis. In terms of the value of the US dollar, according to Michael Cembalest of J.P Morgan, any major change is likely to take a long time considering the US only provides 25% of world trade while being used in 85-89% of foreign exchange or similar transactions.

 

On a longer-term basis a more concerning factor is the growth of Chinese science and technology. They appear to be the leader in the development of fusion for utility purposes. This is happening at the very same time US utilities have become the best performing sector, in part because of the expected increase in load to produce transferable energy to the ballooning “EV” market.

 

Portfolio Management Moves Implied

During this lull in market activity before a new phase begins, all portfolios should be reviewed to put them in the best position for the future. One approach is to examine all present holdings currently priced at a loss. Unless one sees a major increase in the next 31 days, they should be sold and selectively repurchased after the “wash sale” prohibition of 30 days.

 

The losses created should reduce potential capital gains from selling some of the winners you are less than thrilled with. By all means, please consult with your trusted investment adviser and tax consultant.

 

Correction to last week’s blog:

In the Berkshire Hathaway discussion, the correct spelling of the first name of the Vice Chairman in charge of insurance was published as Amit instead of Ajit, our apologies.

 

 

 

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

Mike Lipper's Blog: My Triple Crown - Weekly Blog # 783

Mike Lipper's Blog: Fire Drill - Weekly Blog # 782

Mike Lipper's Blog: Early Stages of a New Grand Cycle? - Weekly Blog # 781

 

 

 

Did someone forward you this blog?

To receive Mike 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.

 

Contact author for limited redistribution permission.

My Triple Crown - Weekly Blog # 783

 

Mike Lipper’s Monday Morning Musings

My Triple Crown:

Berkshire, Coronation, Derby, plus analytical insights

 

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

 

 

 

Berkshire Hathaway Annual Benefits

One of the advantages of owning shares in this unique company, both personally and professionally, is having the opportunity to learn from Warren Buffett, Charlie Munger, Greg Able, and Ajit Jain. The side conversations with a number of deeply involved investors and managers is an added benefit. For me, my wife, and my son Steve, this is truly an educational experience.

 

In terms of Berkshire, the following is a brief list of short-term (one year) comments:

1. The “float” is expected to be higher than in 2022. There should also be earnings from the railroad.
2. They have heavy property insurance exposure in Florida real estate.
3. GEICO will not be getting the full benefit of the switch to fully automate until at least 2024, possibly longer.
4. The stock is selling below “going-concern value”, suggesting it’s a good use of cash, particularly for heirs.

 

Coronation

While the coronation of King Charles III and Queen Camilla is important to many in the English-speaking world, it is also important to those of us entrenched in the investment world. King Charles produced a more modern version of the over 1,000-year-old coronation with all its pageantry and significance. Globally, he should give us hope we can remodel a financial system showing serious signs of disarray, with the inability to produce good value for all direct and indirect participants. Among which are the problems related to regional banks, commercial real estate, government sponsored inflation, inadequate education, inefficient healthcare, and getting the optimum benefits from layoffs. (More on the latter subject later in this blog.) We should learn what we can from King Charles’s discipline, especially his ability to make painful decisions with a clear view of a desirable future.

 

Kentucky Derby

The Kentucky Derby is America’s most famous horse race, which is unfortunate. The entrants in the race are 3-year-young horses with very little experience. This year’s winner, like many others in the race, had only raced 3 times and had only raced once at the Derby’s distance.  As most blog readers have learned, I believe whatever analytical talents I may have, I learned at the New York racetracks.

 

The payoff after both the tax authorities and track takes their share is important in figuring out if a particular horse is worth betting on. It’s a critical element of my handicapping skill, which I carry over to my financial analysis responsibilities. Not surprisingly, Warren Buffett also learned a great deal from attending local racetracks. One can see this when he explains the key to Berkshire’s insurance success, which is getting the right spread between the rate charged and the risk of loss.

 

One of the determents in this analysis is who you are competing against. This was an unusual Derby in that a number of horses were scratched. The betting crowd (the market) was left without a strong preference or favorite, much like one of the five largest market-caps in most sectors. At the track, the odds-on favorites are often 2 to1, or less. In this year’s race the winning odds-on favorite was 4 to 1. This should have been an alert to bettors that there was a low level of confidence in the crowd’s or the market’s choices. Somewhat similar to a number of market periods we have gone through recently. This filter might have suggested giving a more earnest look at horses with longer odds. Opening up the possibility of identifying a horse with 9 to 1 odds who finished first barely beating the second finisher, a horse with 5 to 1 odds. This type of behavior is why I often favor less popular investments, including small-caps and companies with somewhat blemished records. Particularly when there is a change of jockeys or other key managers. The keys to success in this type of thinking is not the win vs. loss ratio, but the number of dollars won or lost. Or if you prefer, Berkshire’s rate vs risk.

 

Analytical Insights

Hardly a day passes without the media reporting on a company with a new layoff. This is not newsworthy because of the number of people being laid-off, but because it’s happening during a period of high employment where there’s a surplus number of job openings relative to the number of people unemployed. Clearly there is an imbalance, or phrased another way, the people unemployed are different that those employed.

 

This condition requires careful and thoughtful analysis based on incomplete data. I suggest disaggregating the layoffs by presumed causes. The following is a list of types of layoffs and their significance:

1. LIFO (Last In, First Out) is usually directed by HR people from an easy date of employment list, without any further consideration. (I avoided one such occasion personally by going to a senior partner of an institutional brokerage firm which had 5 junior analysts. I pointed out that the likely salaries in aggregate were roughly equivalent to that of one aging but knowledgeable senior analyst. Perhaps my logic or guts worked, all five junior analysts were saved. I left the firm for another opportunity soon thereafter. Of the 4 that remained, at least 2 became productive firm partners.)
2. The opposite approach is sorting by perceived talent and keeping the best. In effect create a talent bank.
3. Friends for life. As I moved up, I recognized that some talented individuals did not fit where the firm was going. I suggested they find a better place and they became friends for life.
4. A layoff can be an essential part of a plan to move an operation, disposing of an activity that no longer fits.

 

Good analysts should try to determine which of the four alternatives most likely fits their described motivation. The LIFO layoff is only helpful in improving overall short-term productivity, as it does not make the remaining workers feel good about working for the employer. This may be unavoidable if the company is a union shop with built in official or unofficial rules governing layoffs. If so, the employer has deeper problems. 

 

In Conclusion

I had a good learning week, and I am happy to discuss my views with subscribers. Whether you agree or not, I can learn from you.

 

 

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

Mike Lipper's Blog: Fire Drill - Weekly Blog # 782

Mike Lipper's Blog: Early Stages of a New Grand Cycle? - Weekly Blog # 781

Mike Lipper's Blog: Pre, Premature Wish - Weekly Blog # 780

 

 

 

Did someone forward you this blog?

To receive Mike 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.

 

Contact author for limited redistribution permission.