Mike Lipper’s Monday Morning Musings
Bifocal Analysis: Short & Long-Term
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Short-Term
The data is so negative that brief and violent rallies are to
be expected. Net stock selling has consistently outpaced buying for each of the
last four weeks. For example, 85% of the NYSE stocks and 81% of NASDAQ stocks fell
in the latest week. As Barron’s noted “cash is looking more appealing since
stock market hedges, bonds, and gold are no longer working.” Employers are
barely replacing the more expensive retiring labor in most manufacturing
functions.
There is a new player in the game, private credit. For the
most part issuers of private credit instruments don’t qualify for bank loans,
and they don’t have long credit histories either. Much of this paper is held in
new funds, which are being sold to retail channels. When one of these loans
gets in trouble it is referred to as a “cockroach”. Jaime Dimon, the CEO of JP
Morgan Chase (*) warned that where there is one “cockroach” there is likely to
be more.
(*) JPM shares are owned in managed accounts.
Market analysts are concerned that the S&P 500 Index has
been locked in a narrow 300-point band for the last four months, with optimists
and pessimist exchanging positions. This week, the lower boundary line was
briefly pierced. If the “500” drops 3% more, then the 400-point range will
become a difficult region for the market to rise beyond for quite a period. This
fear may briefly spark some rallies from the derivative and short players.
Longer-Term Implications of History
One purpose of recorded history is to explain what happened,
at least in the eyes of the winning survivors. The survivors, or their
intellectual heirs, construct rules as to why certain actions are repeated. If
there are enough repetitions the rules become dictum, even though the battle conditions
are different. We are taught from a very early age to follow rules without an
understanding of the conditions that created them. This blind acceptance of
rules has led to occasional great mistakes in politics, the military, sports,
families, business, and of course investing. Historic labels often become shorthand
for rules. For instance: Adam and Eve, George Washington, the NY Yankees,
Democrats, Republicans, Chopin, etc.
As has been noted before, I learned basic analysis at the NY
racetracks. One great lesson from racing lore was Man of War, which had 25
winning races in a row but lost his last race to an unknown horse named Upstart.
Proving unexpected things can and occasionally do happen. My self-appointed
task at the track was to guess the chance of the unexpected happening.
Applying the racetrack experience to investing I looked at
the historical record of Warren Buffett and Charlie Munger for stocks and
companies in which to invest. In an oversimplification there were at least
three characteristics the winners had in common, the nature of customers, the
characteristics of the workforce, and the discipline of integrity. (I suspect
the last was penned by his long-term counsel and director Ron Olson, a fellow
ex-trustee of Caltech.)
If the US stock market does decline materially in the period
ahead, I will try to apply the track lessons learned. Charlie Munger taught
Warren Buffett it was better to buy a good company at a reasonable price and not
wait for a cheap price. For many years there were great companies we didn’t own
because they were selling way above a reasonable price. I expect a number of
these “beauties” will be available at reasonable prices during the next
depression.
Next Depression
I
don’t know when it will happen but based on human nature, I expect it to happen.
The US has had only four Presidents that were restructurers: Andrew Jackson,
Teddy Roosevelt, FDR, and Trump. Below are some parallels to the 1930-1942
depression:
- Each challenged the constitution and fought with the courts
- Weakened the controls on the banks
- Set the stage for war
- Weakened the currency
- Encouraged the retail public to invest in speculative vehicles
- Changed how the US was governed
- All Presidents, except Andrew Jackson, were involved with Japan
No historical comparison is identical, and the future may be
different than the past, but odds favor a closer similarity.
Please share your views, there is much to learn.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932
Mike
Lipper's Blog: Premature: Buying Program to Begin Soon? - Weekly Blog # 931
Mike
Lipper's Blog: Expectations Changing? - Weekly Blog # 930
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