Mike Lipper’s Monday Morning Musings
Turning Point?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
The Way We Think
Our musings are essentially focused on the development of our thinking regarding the future direction of equity investing. Hopefully, this gives an early glimpse of the future, with the end-product being advice on whether to buy or sell stocks. To accomplish this result as an equity analyst I look for clues in the uncertain worlds of commodities, economies and global politics, particularly when they appear to be out of balance.
Too Much Good and Bad
One age-old characteristic is the excess of one force pushing
other elements out of normal balance. Shortages and excess productive overcapacity
create imbalances that cause market prices to dramatically move over time.
Usually, one looks for shortages that drive market prices. Today, I believe we
should look at the impact of a factor that is distorting normal balances too
much.
Debt is the most out of balance concern in the world, particularly
in the US. There is a record peace-time deficit and increased public investment
in private debt, which has historically been borrowed by governments,
universities, charities, businesses, and families.
With so much debt, debtors are being forced to raise
interest rates to compete for sources of funding, increasing the size of their debt
service payments. While this is bad for society, it is not the worst problem. What
is much worse is the quality of debt being offered to those who are increasingly
less schooled in debt management. A factor likely to lead to sudden default
and/or late payments. When these problems come home to roost lenders will be short
of the cash needed to meet their own needs.
The Crux of the Debt Problem
The critical issue is the borrower’s words proving to be
inaccurate, either through dishonesty or naiveite. The borrower’s naiveite is often
accompanied by the lender’s naiveite. Shouldn’t the lender be more careful with
a borrower who does not have a long history of repayment, or a borrower counting
on cyclical cash flow patterns being higher than expected tax payments or debt
repayments.
I am not suggesting borrowers are totally naïve or impractical.
We are in the 8 days of a bitterly fought election campaign, and politicians
and media pundits don’t have pristine records forecasting payments and
repayments. Market participants are somewhat aware of the problem and are
demanding higher interest rates. Are they at the right level?
Are There Other Problems?
Investor actions are sending out warning signals. For the
last two weeks, many days have seen more shares sold on down prices than up. On
Friday, the NASDAQ Composite Index, home of most of the “AI” players, has pierced
the 2600 support level it had been hugging. This was anticipated by the
American Association of Individual Investors (AAII) with their declining outlook
for the next six months.
These concerns are all classical market worries. However,
there is a new concern that may be quite appropriate. The top economist for
Apollo believes that “AI” has not deliver profits beyond the “AI” sector
itself. (I wonder how reliable the forecasts of contracted customer revenue for
new data centers will be. Will they produce sufficient profits to meet the cash
flow needs of the centers and their customers?)
Now is the Time to Think About Market Gains
Market declines create opportunities, in some cases large
ones. (Warning, Berkshire Hathaway is the largest stock in many of our client
and personal portfolios. Consequently, you should be cautious in believing this
forward-looking analysis, which could be wrong or take too long.)
Warren Buffett and Charley Munger assembled the largest
collection of private and publicly traded companies. For the most part they
picked well, but some of their investments were mediocre or worse. With new CEO
Greg Able, the firm is gradually changing. He noted that some of their independent
investments can profitably establish mutually beneficial links. To aid in these
efforts he has installed a few executives to build alliances in anticipation of
mammoth-sized payoffs in the future.
I see Berkshire undertaking a major housing effort that will
build a series of differently priced housing communities supported by their own
mortgage companies and a large real estate broker. The company will own one of
the largest public utility groups, which can utilize nuclear power. Their
railroad will benefit from efficient distribution of increased exports and
imports. Foreign investments will grow and will be a good hedge against the
value of the dollar. Finally, their stock portfolio is likely to benefit from their
new investments and their companies in the financial sector, which looks like a
sector that will undergo lots of change in the coming years.
As usual I appeal to our subscribers to teach me where I am
wrong, I am willing to learn.
Did you miss my blog last week? Click here to read.
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