This Weekend’s Learning Sources - Weekly Blog # 939

 

 

 

Mike Lipper’s Monday Morning Musings

 

This Weekend’s Learning Sources

 

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

 

          

 

Identifying sources of learning

One of the main differences between us and most animals is that our brains are larger, which hopefully means we can learn more. The end of this week supplied three sources of learning. The three teams of instructors were: Tim Cook (Steve Jobs), Berkshire Hathaway’s Annual Meeting with shareholders (Warren Buffett/Charlie Munger and Greg Able), and the Bettors and Horses at the Kentucky Derby. From each I can learn a lot. Matter of fact, each could be a whole semester at Business Schools instead of what they are currently teaching.

 

Tim Cook (Steve Jobs)

At the end of the so-called work week Tim Cook conducted what was his last quarterly meeting for shareholders and analysts of Apple (*). He focused on the company’s critical relationships with customers and what is owed to them. He stressed what Steve Jobs taught, the betterment of the users’ lives. These were the critical thoughts passed onto the oncoming new President of Apple. We should pass these views onto all we deal with, focusing less on what they paid us and more on what we did for them.

* Owned in personal and client accounts.

 

Warren Buffett/ Charlie Munger & Greg Able

Mr. Buffett spoke to many of the shareholders attending the annual Berkshire Hathaway (*) meeting, both in person and electronically. His advice for people reaching 50 years or older was to switch their primary investment focus from making money to capital preservation. He emphasized saying no, particularly to not well understood new investments. (I do not own any “AI” stocks directly, but there are many in mutual funds I own. The key to their future is what they have yet to produce, not what they are selling today.) He believes investors in retirement should prune their holdings and try to explain what they own to their heirs, feeling it is more beneficial to focus on how the inheritance should be used rather than the intricacies of what is owned.

* Owned in personal and client accounts.

 

Greg Able is the new President of the company and is focused on improving the operations of the company. When the talented Chief Financial Officer transitions into retirement, he will be replaced with both a CFO and a new lawyer. Furthermore, for the 31 private companies owned by Berkshire, he has appointed a trusted internal executive as leader. Instead of doing just financial oversight, he will be reviewing the operations of the formerly private companies. Good policies of the past will be reviewed to see if they are right for now.

 

My personal view is that there are two major trends which we did not have to deal with in the past, but which could be much more important in the future. The first is one of the causes of financial and economic cyclicality resulting from not repaying debt on time and at full value. Defaults on debt have led to depressions in the past and have been the cause of unplanned contractions.

 

In the decade of the 1920s into the early 1930s society encouraged the global extension of debt at the retail level, including its use as a defense against tariffs (Smoot Hawley).  Currently, we have an expanded federal debt led by someone who needed to renegotiate his own debt. Our government encourages investing retirement capital in debt. The national debt is larger than the GNP. (Old debt has a due date, while GNP is produced each year.)

 

The second dangerous trend is the value of the dollar in world trade. As debt grows, overseas investors value it less. Meaning, it not only becomes more expensive for funding our debt, but also for paying for imports of food, clothing, and raw materials. We are better positioned than many other countries who are in worst shape, but not all. Asia, which has a younger population and a disciplined workforce, is in better shape. Higher inflation leads to lower long-term value of the currency. One measure of inflation not issued by our overworked government is the ECRI Index of Industrial Prices, which was up 140.35% this week for the last 52 weeks.  

 

Kentucky Derby

I brought this on myself by stating that I learned the basic tenants of analysis at the New York Racetracks. A subscriber asked who I was betting on in the race. Where do I begin? Perhaps with two axioms. First, as with most things in life, short answers are often wrong. The short answers are wrong because they are stated without limits and conditions. That brings us to the second axiom, I don’t like losing. I don’t like losing because it is a double loss. The first loss is the sum wagered, and the second is the loss of funds necessary for future betting and other things.

 

There are two negatives against betting at the track. First, the track takes a cut of all bets and there are personal expenses of travel, admissions, and food. Second, as a game of chance it is rigged because of the track’s take. Additionally, winnings are taxable at federal and state levels. There is still another drawback, about 30% to 50% of the time the lowest yielding horse wins. Most of the time those winnings are not large enough to offset losses and expenses incurred. I address this problem by limiting the number of times I bet, usually 3 out of 9 races and rarely at the lowest odds. The advantage of this approach is staying away from betting at the lowest odds, which are the most popular horses.

 

If these issues did not cause you to find other things to bet on, the elements of the Derby might. First, the race is only for three-year-old horses. While horses are born for the record throughout the year, under racing law all horses are born on January 1st. Some horses start their racing history at 2 years old, but many do not. By the time they are three years old they are adolescent. (From a scientific standpoint it would be useful to know the actual date of birth. There is poor but available information as to the number of official races the horse has run. In terms of the Derby, the range I heard was 1 to 4 races.) For those of my age, I am reluctant to take adolescent horses and most humans seriously.

 

So, after all this I did not place a bet on this year’s Derby. Most of the time I am not interested in races for three-year olds that are run any earlier than June, which starts with the Belmont Stakes race. These races are also a bit suspect because the course has been altered.

 

I would not have bet on the winner this year. However, the trainer deserves to be congratulated as she was the first woman trainer to win the Derby. The night before she had a dam which won the Kentucky Oaks with the same jockey who won the Kentucky Derby. Quite an accomplishment.

 

All of this shows I am still a student and hope you are as well.

                                        

 

 

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

Mike Lipper's Blog: Watch Out for the Four - Weekly Blog # 938

Mike Lipper's Blog: Investors’ Interlude - Weekly Blog # 937

Mike Lipper's Blog: Not Yet Ready for a long-term Solution - Weekly Blog # 936

 

 

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A. Michael Lipper, CFA

 

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A Different Year End Blog: Looking Forward - Weekly Blog # 869

 

 

 

Mike Lipper’s Monday Morning Musings

 

A Different Year End Blog: Looking Forward

 

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

 

 

 

Using Mutual Fund Data for Other Investors

Mutual Funds reveal their investment performance to the public every trading day and reveal their portfolios quarterly. In many cases the funds are managed by large investment managers responsible for other accounts. Their portfolios by implication reveal some of their philosophy of investing for other accounts.

 

Each week the London Stock Exchange Group publishes fund data that I used to produce. The report tracks 103 equity fund or equity related fund peer groups. Using the last five years of data, the shortest time period one should use in assessing investment performance, only 17 peer groups beat the +14.58% five-year return of the average S&P 500 index. (In selecting funds, I prefer to use 10 years.) There were three peer groups that did better than the S&P 500 Funds Index:

• Science & Technology +17.72 %
• Large-Cap Growth +16.62%
• Energy MLP +14.64%

Remember these are averages, so within the peer group some funds did better or worse than their group average. With only 16.5% of the groups beating the index, I question whether we are preparing a base for a meaningful general stock market advance.

 

Current Structure of the Market

The last four trading days of last week may not be significant but could be. The next two trading days will probably be dominated by last-minute tax-oriented transactions initiated by market makers or late players.

 

In the last four days 49.4% of the shares on the NYSE rose, while 55.8% rose on the NASDAQ. The more bullish NASDAQ players generated 205 new highs, compared to only 73 on the NYSE. Investors participating in the weekly AAII sample survey have been moving toward neutral in the last three weeks. Three weeks ago, the Bulls represented 43.9%, but they only represent 37.5% in the current week. The Bears only increased by 2.4% to 34.1%.

 

Possible Longer-Term Signals

Both political parties feel they should direct the private sector to a much greater degree than in the past. The latest example of this is the FDIC, which has wrung an agreement from the NASDAQ to limit the amount of ownership in small and regional banks. This a long echo of the “Money Panic of 1907” that Mr. Morgan solved in his locked library, which led to the creation of the Federal Reserve. A generation later the US government realized the Fed couldn’t help local farmers, their banks, and suppliers, so they passed the Smoot Hawley tariff bill, which was reluctantly signed by President Hoover.

 

Both the good and bad leaders of many countries recognize that the US has not won a war since WWII. Consequently, the growth of China in many fields is disturbing. Tariffs may protect some US businesses at a huge cost to lower income consumers and eventually isolate the US from growing markets, diminishing our military strength.

 

These issues and others are what we will be dealing with in the new cycle we have entered.

 

We wish you, your family, and friends a healthy, happy, and prosperous New Year.

 

 

 

 

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

Mike Lipper's Blog: Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

Mike Lipper's Blog: Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

Mike Lipper's Blog: It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

 

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Detective Work of Analysts - Weekly Blog # 847

 

         

Mike Lipper’s Monday Morning Musings

Detective Work of Analysts

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

 

Similarities

Good professional securities analysts are not captives of media pundits or most salespeople. They often build their analyses using small details from obscure sources. This is the approach I use each week in preparing the blog. I gather bits of information for a myriad of sources to build a collection of factoids, some of which may be true and useful.

 

What follows is this week’s collection, separated into come-to-mind file folders which are easy to discard.

 

Market Clues

Citigroup regularly produces market judgements that rely on their own data and other indicators. Most interesting to me is their prediction for specific dates a year in the future. They also study their past guesses and claim to be accurate 80% of the time. This is surprising!

 

As has been noted several times in these blogs, I learned analysis at the New York racetracks where the favorites win about half the time, pre-tax and pre-expenses. In my study of professional securities analysts touting their records when seeking employment, their lifetime success ratios are rarely in the mid-60s% when adjusted for appropriate expenses and taxes. There are a number that have very commendable records because they hold winning combinations for a long time, keeping their investments at work.

 

This adjustment to performance data is critical in comparing investment returns. Quite a number of investment returns in the second quarter were single digit results. However, many investors look only at longer returns where results are generally positive.

 

Misreading Performance Data

Like many analysts I look at the weekly summary survey data from the American Association of Individual Investors (AAII). They survey their members to get their market outlook for the next six months, indicating whether they are bullish, bearish, or neutral. This latest week 43.2% were bullish and 31.7% were bearish. This satisfied the bulls and other pundits. The week prior the bullish count was 52.7% and the bearish count was 23.4%. Comparing the two weeks I see a flashing yellow caution light. Professional market analysts consider any reading over 50% unsustainable, but of real concern was the unnerving 29.3% spread between the bulls and bears. The spread for the current week was a little more normal at 11.5%.

 

The decline in the bull/bear spread may be a fluke, or a meaningful signal that the bulls were too enthusiastic. The political news may have created the flip. Chatting with institutional investors, they believe the election is not yet a significant enough factor to cause a change in investment exposure.

 

One of the rising stock groups has been the banks who expect their “NIM” (Net Investment Margin) to be higher in 2025, either because of lower rates increasing demand for loans, or rates being higher and loan demand being enforced.

 

Why Are Interest so High?

No one wants to accept the responsibility for interest rates, not the executive branch nor Congress. Washington plays the game of taking credit for “good things” and avoids being tagged with “bad things”. A number of years ago Congress was able to shift responsibility to the Federal Reserve via its Second Mandate of controlling the level of prices using short-term interest rates, their major weapon. These rates are part of the cost package individuals and companies must deal with. The Fed does not control labor costs, quantities, quality, global trade, or the rate of innovation and invention. The partnership of the Executive and The Executive and Congress control these items, with only the Supreme Court beyond. This partnership has managed these factors since colonial times, particularly at election time. COVID proved to be an excellent time to target the expected vote with money, paying little attention to the inflationary impacts of excess money creation.

 

Tariffs as a Tax Collector

The founding fathers did not have an efficient way to get money to pay for their   war and peace expenses. They adopted the European approach of raising money through tariffs and paid their bills this way for many years. Later, the Internal Revenue Service was able to collect income taxes. By the 1920s tariffs were a less important part of government. Farmers, businesses, and people borrowed money in the twenties, creating high spending and debt. Herbert Hoover, a conservative President, was talked into signing the Smoot-Hawley Tariff, which hurt the sales of farm goods and damaged farmers and farm focused banks. This led to other countries going into depressions and was a cause of WWI. As both presidential candidates display a lack of understanding of economics, we could well repeat the global problems of the 1930s.

 

What One Can Learn from Chocolate?

One of the repeated lessons from Chocolate is that European commodity players like trading Cocoa because of its low margin requirements and high fluctuations. The players periodically got wiped out and attempted to recoup their losses in the coffee market, which is bigger.

 

With that as a background and my unintended ownership in Nestle, I was fascinated by their management accounting. They developed an approach where they created “Real Internal Growth” (RIG). This number excludes price changes and interest rate fluctuations in determining real demand for their products. Currently, they see a shift in demand to cheaper lines for both chocolate products and pet food. (Walmart and Amazon have noted similar consumer reactions.)

 

Working Conclusion:

The financial world is seeing a different future than the real world of the consumer.

 

 

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Mike Lipper's Blog: Our Self-Appointed Mission - Weekly Blog # 846

Mike Lipper's Blog: We are Never Fully Prepared - Weekly Blog # 845

Mike Lipper's Blog: What I See and Perceive By Observing - Weekly Blog # 844

 

 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.