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
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Michael Lipper, CFA
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