Implications from 2 different markets - Weekly Blog # 854

 

Mike Lipper’s Monday Morning Musings

 

Implications from 2 different markets

 

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

 

 

 

On balance the New York Stock Exchange (NYSE) and NASDAQ stocks serve very different investors, as they have different outlooks and current performances. The “Big Board” stocks tend to be older, larger capitalization, have greater media exposure and get more attention from Washington. They are likely to populate brokerage accounts managed or influenced by former commission generators who have since converted to being fee paid advisors. The NYSE also services institutional accounts with substantial capital with limited research and trading professionals, which generally appeals to older clients.

 

Those in Washington and “news” rooms may not be aware that the NASDAQ is home to 4627 stocks vs 2903 for the NYSE, as of this week. In recent years the NASDAQ composite has materially outperformed the NYSE stocks, often identified as the 30 stocks in the Dow Jones Industrial Average (DJIA).

 

NASDAQ stocks are often more volatile than those traded on the NYSE, because they are smaller and have fewer liquidity providers. This may be the reason why those without trading experience shy away, resulting in more block trades and 3-5 times more NASDAQ volume.

 

Many people confuse the NASDAQ with its Over The Counter (OTC) origin. The NASDAQ is a regulated stock exchange, distinct from the OTC market which is held together by the pink and yellow sheets publishing the competing bid and asked spreads of competing dealers. Since its earlier days, important constituents of the NASDAQ have consisted of local companies, medium size banks, and some foreign stocks.

 

While the NYSE focused on its regulatory responsibilities, the NASDAQ grew through an extensive marketing effort. This marketing effort happened at a time when a large number of what we now call “Tech Companies” were looking to find a trading home. These tech companies joined the NASDAQ exchange, attracting younger, more aggressive, professional investors and traders.

 

Implications

Trying to determine the future is impossible, but military intelligence (an oxymoronic term) attempts to do this by gathering separate elements of information to see if they provide a pathway to one of many futures. This is the approach I take in thinking about the future. While most pundits focus on present price relations, I don’t find them particularly useful. We need to guess what future prices will be for specific future periods.

 

In the short run the following inputs may be relevant:

1. This week’s high/low prices were 548/168 for the NYSE vs 411/393 for the NASDAQ (Enthusiasm/Caution)
2. Friday’s percentage of advances were 85% for the NYSE vs 68% for the NASDAQ (Winners are less happy)
3. The weekly AAII bearish sentiment increased to 31% from 25% the prior week.
4. Financial Services shorts as a percentage of float saw Franklin Resources* at 8.5%, FactSet at 6.0%, T. Rowe Price* at 4.6%, Raymond James* at 4.2%, Regional Financial at 4.1%, and the sector at 1.9%. (*held in personal accounts, unhappy          near-term)
5. Ruth’s indicator, the size of the Vogue September issue, is the biggest month for high fashion advertising, perhaps like the lipstick indicator. (The closing of Western shops in China is further proof of the expected global recession, or worse.)

 

Longer-Term Indicators

1. The White House is preparing to introduce a Corporate Alternative Minimum Tax (CAMT) of 15%, which is unlikely to pass the next Congress.
2. Both Presidential candidates are pro inflation in action, if not in words.
3. A front-page WSJ article titled “As Berkshire Hathaway* Rallies, Its Looking Too Rich to Some”, is an example of poor research. Warren Buffett has repeatably stated that he is not running the company for the present shareholders, but for their heirs, which is far beyond his 93 years. To my mind, the GAAP published numbers are misleading considering the SEC’s regulations. The value of a stock is an elusive intrinsic number. The most difficult part is the private value or current price of the 60 odd companies Berkshire owns, which are carried at purchase price plus dividends paid to Berkshire. To the right buyer, the aggregate eventual price for these companies is worth a multiple of their carrying value. (“Intrinsic Value” was a concept that I learned from Professor David Dodd, who authored “Security Analysis” with Ben Graham. This is probably the reason I and some of my accounts own the stock. We own the stock for its eventual value to our family.)
4. The world is in stages of a slowdown or a recession, with both the US and China suffering. Always treating China as an adversary inhibits our access to the Chinese market and their skills, preventing us from reaching our potential. (I don’t have a suggestion on how to conduct this rescue effort. It is like training a dangerous animal).                                                                                                                                         

 

Conclusions:

There will always be bear markets, which often precede recessions and infrequent depressions. Since we haven’t had a recession in a long time, one is likely coming. Particularly considering the political class’s stock optioned business management and the gift of a highly valued dollar compared to other deficit currencies.

 

The key question at the moment is when we will see the next INCREASE in INTEREST RATES and INCOME TAX RATES, which the Fed will follow.

 

Key Question: What is Your Bet as to When?

 

 

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

Mike Lipper's Blog: Investors Focus on the Wrong Elements - Weekly Blog # 853

Mike Lipper's Blog: Lessons From Warren Buffett - Weekly Blog # 852

Mike Lipper's Blog: Understand Numbers Before Using - Weekly Blog # 851

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

 

Investors Focus on the Wrong Elements - Weekly Blog # 853

 

Mike Lipper’s Monday Morning Musings

 

Investors Focus on the Wrong Elements

 

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

 

 

 

Combing Mr. Buffett with Albert Einstein

Compound interest, the eighth wonder of the world, is wrongly attributed to Einstein according to the people at Caltech. Nevertheless, Warren Buffet stated, “He who understands it (compound interest) earns it. He who doesn’t pays it.” The better long-term investor understands it and uses it in drawing up his/her long-term strategy.

 

I have tended to use a long-term lens in my lifetime focus on mutual funds. My particular focus is the long-term, the ten-year record of the average performance of 30 equity fund indices for the last 10 years through August. Of the 30 only 7 had double digit returns, the highest being Health/Biotech which rose 15.67%. I also looked at the 25 largest stock mutual funds for 5 years, 17 of which produced double digit returns, with only one reaching the twenty percent level. It was Invesco QQQ Trust, which gained 21.30%.

 

This research reminds me of one pension plan a number of years ago which sold all its equities when the portfolio was up 20%. It was one of the best performing pension funds. Strange for me considering my background to suggest that superior performance could well be a signal to reduce investment. I say this knowing that every few years there is a period when one or more funds gain 100%. Strangely, none of these wonders makes the best performing list for the five or ten-year period.

The Media and Frequent Statements by Pundits

Traditionally, media outlets get more attention when the news is bad.   However, in covering the market and economy there is much space devoted to “happy news”. What seems particularly true is headline editors, correspondents, and allocators of space/minutes seem to share a single political view. It is occasionally worth reading to the end of an article where the other point of view gets some exposure. Operating margins for news distributors are under pressure, which has led to surveys where the number of people polled is only between 1,000 and 1,500. This might be okay, except that many people on the right don’t trust polls and media related agencies and thus do not participate in polls, often causing the prediction of incorrect election results.

 

What Should We Be Following

• Unlike the current situation in the US, many nations are seeing younger people move up. This is particularly true in the Middle East, Africa, and Asia.
• China is exporting surplus steel, which amounts to half of what they produce
• Our Presidential election on both sides exaggerates
• their commitment to integrity
• The pouring of money into small company start-ups will curtail the future of small business capital formation. The odds of repaying these loans and other bribes will probably be similar to the repayment of student debts. The unstated purpose of these programs is to hurt the families and friends of the would-be entrepreneur.

 

What elements are you watching to help make decisions about the two apparently unrelated games, equity markets and economy? How will global problems impact them?

 

 

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

Mike Lipper's Blog: Lessons From Warren Buffett - Weekly Blog # 852

Mike Lipper's Blog: Understand Numbers Before Using - Weekly Blog # 851

Mike Lipper's Blog: The Strategic Art of Strategic Selling - Weekly Blog # 850

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Lessons From Warren Buffett - Weekly Blog # 852

 

         

Mike Lipper’s Monday Morning Musings

 

Lessons From Warren Buffett

 

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

 

 (Many subscribers will receive this blog on the regular Monday schedule, but some distributors are taking Monday off, so you may not see this blog until Tuesday.)

 

 

As Often the Case, Media and Other Pundits Missed the Opportunity to Learn 

The August 29th New York Times headline stated, “Berkshire Hathaway Hits $1Trillion in Market Value”. However, the headline was essentially a current events piece, which missed an opportunity to plum Mr. Buffett’s actions. In so doing, they learned no lessons from his current and historic activities derived from an extremely successful professional investment career. 

 

Caution: Bias at Work 

Berkshire Hathaway is the largest position in my personal accounts. Perhaps more significantly, I share a responsibility with Mr. Buffett, I manage money for personal accounts. We are not managing money for our own benefit, but for our heirs. In my case, it begins with starting to care about the fourth generation. 

 

This orientation leads to largely investing strategically, which means positions are permanent unless conditions change materially. This desire separates Mr. Buffett and me from most professional/individual investors who are more focused on tactical approaches. Most investors react to sell signals, while we focus on disappointments as a need to re-underwrite. We hope to add to our holdings at cheaper prices while extending our holding period. 

 

Strategic Diversification 

Changes occur at different times for different opportunities, making it wise to take advantage of changes with different tools. While Buffet is always looking for lasting value, he has found a way to take advantage of these situations with different tools.

  

Berkshire was initially mostly a buyer of cheap stocks selling below book value, which worked reasonably well coming out of the depression. The focus changed to buying good companies at fair prices when Charley Munger came on the scene. As fairly priced securities became scarce and Berkshire’s assets grew, cheap assets were to be found in the private assets of whole companies. After a few mistakes they learned how to pick winners.

 

For many years the wholly owned companies were larger than the publicly owned and publicly traded companies. Within this collection of companies there were a few insurance companies, including GEICO and other casualty insurance companies. The primary attractiveness of these companies was “the float”, allowing for the use of client cash before it was needed to meet claims. The insurance assets grew, and they hired very talented people to underwrite very large risks. Most casualty insurers were risk adverse, but Berkshire looked at insurance risks as opportunities at very high rates. On balance the rates were larger than the risks, which allowed for large, long-term “floats”. The final, or perhaps the first type of asset was cash. 

 

Cash, the Intermediate Asset 

Most investors treat cash as the ultimate reserve asset, but not Warren Buffett. After segregating Berkshire’s $100 billion in US Treasuries, he devoted the remaining cash pile to acquisitions. Buffet recently sold 50% of his Apple stock and enough of his Bank of America stock to drive it below 5% of its outstanding stock value. He did not buy any of his own stock with the proceeds. (I suspect he has converted more of his assets to cash.) 

 

I have stated that these moves are the most “bullish” indicators I have seen. I don’t know whether this cash will be used for the acquisition of a private company or a publicly traded stock. I have been told he has made some offers, but he has been outbid. When the market breaks, his cash will become more valuable. 

 

Some other Buffet lessons are useful in building a picture of how his mind works: 

• Losing is part of winning 
• Cash is not king 
• It is okay to change 
• Buy businesses, not CEOs 
• Don’t buy art as an investment, buy it for pleasure 
• There is no such thing as growth or value stocks as Wall Street generally portrays as contrasting asset classes. Growth stock is part of the value equation. 

 

 

Question: Are you utilizing any of Buffett’s lessons? Which do you disagree with? 

 

 

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

Mike Lipper's Blog: Understand Numbers Before Using - Weekly Blog # 851

Mike Lipper's Blog: The Strategic Art of Strategic Selling - Weekly Blog # 850

Mike Lipper's Blog: Investment Second Derivative: Motivation - Weekly Blog # 849

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Understand Numbers Before Using - Weekly Blog # 851

 

Mike Lipper’s Monday Morning Musings

 

Understand Numbers Before Using

 

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

 

The most common mistake made by investors is too brief an introduction to the investment and economic numbers used by most who chatter about “the Market” or the “Economy”. For example, the three most quoted US stock market indices are the Dow Jones Industrial Average, the Standard & Poor’s 500, and the NASDAQ Composite. Each of these unique indices was created for a specific purpose and was designed for a specific audience. However, they are now used for numerous purposes worldwide, including New York, Chicago, Washington, London, Tokyo, and Shanghai. The biggest mistake is assuming the indices are identical. Although the indices all have short comings, proper use of the numbers can lead to useful insights in making decisions.

“The Dow”
The most well-known of all market indices is the “Dow” (DJIA), although it was not the first indicator from the Dow Jones newsletter writers. They originally tracked the performance of trunk line railroads as the most important stocks in the 18th Century. Later, due to the industrialization of America, they created an index of a small number of large industrial company stocks. The main readers of their newsletter were retail brokers. At that time, it was believed that the higher the price of shares the higher the quality, making them more valuable. This led the DJIA to be weighted by the prices of the shares. As is often the case, there was unanticipated demand for the results achieved by the index. Consequently, they took advantage of the wire systems of both the large “wire houses” and the press in developing a national and international market for the index. (The equivalent of the Rothschild’s carry pigeons.) Most local papers, and later radio/television, quoted the close of the NYSE market by using the “Dow”.  Thus, across the US many more people than owned shares were exposed to the index.

The Washington Applications
Political people in Washington started following the index as a measure of the economy. They used it as a gauge of what local voters thought about the economy. The Fed’s Open Market Committee consisted of a rotation of the presidents of the local Federal Reserve Banks, whose districts were roughly tied to the size of the financial assets the local reserve banks supervised. The boards of directors of these local reserve banks all have financial leaders familiar with the DJIA. Thus, the index became an unofficial factor in bank regulation.  Fed PhDs, recognizing the limits of a 30-stock index in producing many economic studies, used NYSE data to supplement the DJIA. (This thinking led to the recognition that other indices would be needed.)

Standard & Poor’s 500
Historically, the index that next came into use was the S&P 500, which was primarily used by institutional investors. This index was designed to correct the acknowledged problems of the DJIA. First, it had roughly 500 stocks. Second, it used the market capitalization of the issuer’s common stock for weighting purposes. Standard & Poor’s is a premier bond rating organization which also covers equities. The company had an extensive menu of data points that it used to assign credit ratings on stocks, which it also applied to the S&P 500 Index. Thus, we can now compare the price of various indices relative to their book values. The S&P 500 Index trades at 5.09 times book value vs 4.08 times for the DJIA. This comparison highlights the S&P 500 index’s investment in companies perceived to possess more growth than those in the DJIA.

In my work in analyzing large-cap mutual funds, which have many more assets than other slices of the mutual fund pie, I use the SPX as the first comparator before more narrowly using growth, value, and core breakouts. I similarly do the same for most global funds. Unfortunately, I can’t find enough data rich breakouts in many local markets, indicating these funds are primarily looking for local shareholders.

NASDAQ Composite
This 3rd index does not have a size bias. The index is comprised of bank stocks, local companies, and companies located in various geographic locations, including Canada, Israel, China, and numerous other countries. Additionally, it is the initial home for companies recently gone public. Consequently, many of the stocks on the NASDAQ have limited liquidity due to the low number of shares offered and/or the founders retaining a significant portion of the stock. It is not unusual to see 4 or 5 times the number of shares traded on the NASDAQ compared to the “Big Board”.  

The “Market” is Changing
Volume is more sensitive to speculative opportunities than highly rated investments and it is amplified by the use of derivatives, ETFs, off-market transactions, and less capital present on the floor. Dow Jones S&P Global is now the owner and provider of both the DJIA and the S&P 500. Even though there have been changes, there are still missing elements in market tools.

The separation between stock and commodity markets does not make it easy to provide a fuller solution to evaluate a uniform portfolio of assets and their risk modifications in a 24-hour, seven-day world. Agricultural products, impacted by weather, are important to food manufacturing and distribution industries. Many, if not most business cycles, are impacted by agricultural disruptions, real or feared. One of the causes of the great Depression was farm belt problems caused by excessive debt creation and poor climate conditions. These led to the passage of the Smoot-Hawley tariff and its global ramifications.

(While agricultural products as a percent of population is much smaller today than in the 1920s, the global impact may be the same order of magnitude.)

Moving on to the hard commodities, the timely completion of new mines and transportation systems can be disruptive to many areas, including stock markets.

For every global consumer, global producer, shareholder, and military person, the fluctuating value of major currencies is a cause of concern. This summer the US dollar dropped from $106.4 to $100.7. (This is likely to have an impact on inflation)

A Working Conclusion
Indices are a useful snapshot, but what is needed is a continuous motion picture and an understanding of what is causing the change, including built in construction biases and an identification of what is missing. If you have any thoughts, please share them.

 

 

 

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

Mike Lipper's Blog: The Strategic Art of Strategic Selling - Weekly Blog # 850

Mike Lipper's Blog: Investment Second Derivative: Motivation - Weekly Blog # 849

Mike Lipper's Blog: Fear of Instability Can Cause Trouble - Weekly Blog # 848

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

The Strategic Art of Strategic Selling - Weekly Blog # 850

 

         

Mike Lipper’s Monday Morning Musings

The Strategic Art of Strategic Selling

 

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

 

Playing the Game to Win

Playing baseball, producing a great painting, or writing a great piece of music, depends on many moves beyond a single swing of a bat, a great color, or a single melody. It is the same managing an investment portfolio. Amateur investors often evaluate two to hundreds of individual securities to choose a single security to sell.

 

Investors acting as long-playing professionals consider a myriad of factors in making the decision to sell a portion of their assets. The sole decision should not be based on the odds of the price of a security rising or falling a meaningful amount in a significant time period. The purpose of this blog is to examine the other factors one should consider.

 

A well-considered security contributes to the rising or falling of prices for the entire portfolio, in part as a result of its weight in the portfolio. Some managers may want to equal weight their components, but time creates changes in weighting. Other managers may choose to heavily weight some positions or have a portion of their portfolio as a "farm-team". This allows them to avoid missing the right idea, without making a significant commitment. One way to reduce daily volatility is to have a large number of positions, at the expense of near-term performance.

 

Other ways to examine a portfolio is to evaluate the risks the portfolio manager chooses to take. These include some of the following:

Inflation

Foreign Exchange

Political Risk

Critical Personnel

Legal Concerns

Tax Risks

Concentrated Personality Risks

Engineering and Manufacturing Risks

Other Risks

 

One of the bigger risks is owning too many speculative stocks with inexperienced shareholders. Warren Buffett, in managing Berkshire Hathaway (*), adjusts the size of some of his larger positions and/or hedges some holdings with others.

(*) Positions held in managed and personal accounts.

 

Some Clues in Plain Sight

• Industrial prices, as measured by the ECRI, are slightly lower than a year ago.
• The implications of having large short positions may not be as negative as it appears. Some of these may be short against the box.  (Short position offsetting similar long positions. Possible examples are Franklin Resources 7.72% and T. Rowe Price 4.21 % of float. Both are held in personal and client accounts)
• There are approximately 5 times the number shares traded on the NASDAQ vs the NYSE. This suggests that in a low-volume week the remaining trading interest is speculative.
• Studies indicate tariffs are inflationary and will lead to declines in employment, growth, and competitiveness.
• James Mackintosh, a WSJ columnist, suggests the market is very expensive using 3 measures of CAPE adjusting for inflation the S&P 500, and the Fed model. (If one looks at long-term rate of gains performance records. They decline over time, the longer the period the lower the rate of gain and are below the spectacular performance of high-performing stocks. This probably means large gains now are eating into longer-term performance results.

 

Question: Does anyone see parallels to the period between the assassination of the Archduke and the beginnings of the actual conflict and starting WWI?

 

 

 

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

Mike Lipper's Blog: Investment Second Derivative: Motivation - Weekly Blog # 849

Mike Lipper's Blog: Fear of Instability Can Cause Trouble - Weekly Blog # 848

Mike Lipper's Blog: Detective Work of Analysts - Weekly Blog # 847

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

 

Investment Second Derivative: Motivation - Weekly Blog # 849

 

         

 

Mike Lipper’s Monday Morning Musings

 

Investment Second Derivative: Motivation

 

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

 

 

 

Useful Investment Process 

Far too many people entering the investment arena start with the choice of what security to buy. I suggest that is like baseball, swing at the first pitch and each next pitch, this gives the pitcher/catcher an advantage with each subsequent pitch. However, characterizing each pitch gives the batter some of the lost advantage. With no disrespect to the titans of the diamond, this approach is unlikely to be sufficiently successful in the investment game.  

 

The second derivative is critical for a long duration of successful investing. The key to understanding why it is critical is based on the realization that every factoid is derived from a competitive drive in the investment game, and it is not limited to only future investment performance. The media is competing for “eyeballs”, audience, future investment banking opportunities, the listing of events, relative industrial rankings, reputations, etc. The first level of understanding of any factoid directed at the investor is understanding the motivation of the sender. While the real motivation is almost never publicly revealed, a juxtaposition of past factoids or positions will often give a clue as to motivation. One useful screening approach is to gather inputs from different sources. In general, small bits of information are especially useful, particularly with some misinformation.   

 

Below is a current almost random list of factors that can lead or mislead in making critical judgements, at least until corrections appear and the exercise begins again: 

• The change in industrial prices year over year was -4.16%. (This suggests that manufactures selling to industrial users may be in contraction.) 
• A somewhat parallel view can be drawn from the table of weekly prices published in Saturday’s WSJ, where only 38% rose while 62% declined. (These two price views do not cover services, which represent about 70% of the US economy.) 
• Despite price pressures caused by low transaction volume, financial buyouts have not been easy. Hargreaves, Lansdown was finally sold after four attempts. 
• US sales of electrical vehicles have been slower than in China. More than half the cars sold in China were electric or hybrid vehicles. 
• Chinese bond yields 2.13% 
• Investors around the world are investing in Bond ETFs, which suggests to me there is liquidity risk in the future. 
• Since the time of Mao, Chinese Party leaders have visited together in the seaside resort of Beadle. They appear to view the main democracies of the world as weak, both politically and defensively. These democracies are underspending on their military by 300+%. They believe time is on their side. 
• A relatively high valuation for many equity pools suggests we do not have the resources to solve enough problems to fund our futures. 

What are your indicators that will produce investment returns similar to what we have enjoyed in the recent past?  

 

 

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

Mike Lipper's Blog: Fear of Instability Can Cause Trouble - Weekly Blog # 848

Mike Lipper's Blog: Detective Work of Analysts - Weekly Blog # 847

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

 

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Fear of Instability Can Cause Trouble - Weekly Blog # 848

 

         

 

Mike Lipper’s Monday Morning Musings

 

Fear of Instability Can Cause Trouble

 

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

 

 

 

Instability Changes the Players

Historically, the perceived strength of allies provides comfort to all fearing future conflicts. Changes can lead to instability, including a change in leadership, an unexpected industrial and military technology change, and demographic change. Some of these changes may happen almost overnight, while others may take generations.

 

In studying what caused World War I, all too many focus exclusively on the assignation of the Archduke of the Austro-Hungarian Empire. I suggest the following causes which arose at least 50 years before the assassination on June 28, 1914.

1. The declining economic power of Austria, due to excessive spending by the government and the wealthy.
2. A population still loyal to their old national governments.
3. The unification of Germany, which came much later than the other European and Middle Eastern countries. Germany was also late establishing colonies in Africa when compared to Britain, France, Italy, Spain, Portugal, Belgium, and the Netherlands.
4. The evolution of shipping from wind to steam power, and the development of the land-based maneuver practiced by Stonewall Jackson.
5. The rise of the US as a global sea power during the Spanish-American War (Great White Fleet).

Applying the same type of geo-politics/economics to the US after the meaningful stock market drop that followed the decline in jobs. The following elements should be noted:

• The pundit led consensus was wrong on the President’s capabilities and many factors concerning the economy.
• The rapid fall in the quit rate points to a further decline in the employment cost indicator.
• Commodity funds are cutting copper positions.
• Fundamental changes in the structure of the US stock market: In the latest week, NASDAQ trading was 6.6x more than the NYSE.
• In July, the performance of the equal weighted S&P 500 was 3% better than the cap-weighted version. Among the stocks with positive performance for the week were: Apple*#, Coke#, and a number of insurance stocks. (* owned by personal accounts, # owned by Berkshire Hathaway)
• 77% of NASDAQ stocks declined last week, versus 66% for the “Big Board”.

As both a contrarian and someone who reads history, I believe that Mr. Buffett building his cash & equivalent pile is the most bullish view I have seen in a long time. Mr. Buffett is getting ready to make positive investments in the future, he is not building reserves. I hope all of our subscribers are preparing to be bullish, which does not mean buying right now.

 

 

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

Mike Lipper's Blog: Detective Work of Analysts - Weekly Blog # 847

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

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

 

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.