A Contrarian Starting to Worry - Weekly Blog # 886

 

 

Mike Lipper’s Monday Morning Musings

 

A Contrarian Starting to Worry

 

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

 

                             

 

Misleading Financial Statements

First quarter earnings reports, led by financials, are generally positive. Good news if maintained often leads to rising stock prices, which is not what at least one contrarian is expecting. Nevertheless, comments and actions by decision makers at various levels highlighted those worries in April.

• In the wealth management industry, one is seeing an increase in smart firms selling out at good prices. These firms are being paid by companies who believe they need to bulk up rather than do what they do best.
• Some endowments and retirement plans are shifting to less aggressive investments or passive strategies, suggesting the intermediate future appears riskier.
• Buyers of industrial goods or materials are paying less than they were a year ago. The ECRI price index is down 8.08% over the last year.
• Active individual investors, or their managers, are predicting a worsening picture in the next six months. The American Association of Individual Investors (AAII) sample survey’s latest reading shows the bulls at 21.9% compared to 25.4% a week earlier.
• In April, 48% of businesses announced reduced profit expectations, compared with 33% in March. More concerning, 41% lowered their hiring expectations, versus 29% the month before.
• Fewer Americans are planning to take vacations this year. Those planning to take one are using their credit cards less, said American Express and Capital One.

We may get some useful commentary next weekend from the new Berkshire Hathaway Saturday annual shareholders meeting format. The somewhat shorter Berkshire meeting with different speakers maybe cause a day’s delay in sending out the weekly blog.

Since the middle of the last century, we have seen a growing concentration of investment firms and banks. In the first quarter of this year, Goldman Sachs, JP Morgan, Morgan Stanley, and Citi were involved with 94% of global mergers & acquisitions (M&A). With more structural changes likely to be caused by modifications in trade, tariffs, taxes, and currencies, the odds favor continued concentration. This concentration may well lead to increased volatility and a reduced number of competent financial personnel throughout the global economy. This is unlikely to make investing easier for some of us.

 

Question: Can you show us a bullish point of view where we can invest for future generations?      

 

 

 

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

Mike Lipper's Blog: Generally Good Holy Week + Future Clues - Weekly Blog # 885

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Caution: This Time Is Different - Weekly Blog # 825

 

      

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:

1. 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.
2. Berkshire has been a net seller for the last four quarters, including two stocks that we own, BYD and Apple.
3. 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

 

 

Did someone forward you this blog?

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.