Mike Lipper’s Monday Morning Musings
Switching Prime Focus
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Functions of Analysts & Portfolio Managers
Many analysts who publish their work focus on just reported results, and to a minor extent estimates of the next to be reported results.
As a contrarian thinker, I am used to being lonely in examining longer-term results. Consequently, I accept that my views may well be very different than what occurs.
Portfolio managers should be focused on expected prices at termination of time periods critical to the account. That is the easer part of the job. The more difficult task is the construction of a portfolio to accomplish the investor’s goals within given time periods.
Both analysts and portfolio managers will only be right some of the time. The critical task is to limit the overall damage to the portfolio and achieve the best delivery for the investor.
Why Switching Now?
In almost all sports, as in life, the best results come from the appropriate combination of anticipatory aggressive and conservative moves.
Coming off a successful effort to call last’s week equity performance, where the Dow Jones Industrial Average (DJIA) generated an 800-point gain on Friday. News reports and commentaries have been more mixed than when I started to mention my more bearish comments over a year ago. With the NASDAQ in a bear market and both the DJIA and the S&P 500 in a correction, I should question my own views. (The S&P 500 was temporarily in bear market territory)
Bearish Comments
Former Democratic US Treasurer Larry Summers said, “We need unemployment above 5% to contain inflation for five years, 7.5% for two years, or 10% for one year.”
Corporations and individuals choose to move for a number of economic reasons, including the new location being better for their relocated and new employees. Citadel is moving its headquarters from Chicago to Miami. Both Chevron and Goldman Sachs are moving major portions of their office staff from crime infested, high tax states, to Texas.
Copper prices have reached a 15-month low. A significant development due to its use in many manufactured products and economists calling it an economic predictor.
The prices paid for the “free lunch” SNAP program has risen 23% in a year. I don’t know how much of this is due to the war in Ukraine, but it does not seem this tragedy is going to get less expensive or end quickly.
Political Lessons
Almost all economic cycles are caused by humans. Among the easiest to spot and perhaps correct are those made by politicians in power from both major political parties.
Perhaps the single biggest problem created results from elected politicians turning over issues to non-elected administrators, which they do because they don’t have sufficient votes to pass them.
For example, this weekend the decision on abortion was punted. Elected politicians in Washington, recognizing this topic was likely to split the population, decided to let the states decide. On Friday it went through to the Supreme Court, because in eyes of some, the local laws were in conflict with the US Constitution. We need to remember that the Supreme Court makes judgements based on law and legal precedent, not moral judgement.
The mistake politicians in Congress made for a period of at least twenty years was asking candidates for their opinion rather than crafting a national law addressing the problem.
This is their common mistake, they turned to unelected and largely untrained administrators to solve a social problem. We see this approach being used for issues before the SEC, FTC, Treasury, State Department, Agriculture, Labor, Interior etc. (In my opinion, it is just a matter of time before various administrative decisions are struck down due to exceeding their legal mandate to act without passed legislation.)
One reason politicians act is polling, although polling has proven to be quite inaccurate in close elections. Polls are also conducted by low-cost brief phone calls to those willing to venture opinions to structured questions.
In the days when I was interested in polling, I found how I asked the question influenced the answer. This is not an unusual view. It is no wonder a growing percentage of people called do not wish to answer the questions. These “no answers” are not tabulated or properly investigated.
Some Incomplete Conclusions
While I did not recognize it at the time, I took a graduate business school course entitled “Security Analysis” as an undergraduate at Columbia. The Professor was David Dodd, with the adjunct professor Benjamin Graham writing the first academically popular book on the subject.
This is the course and book which provided the foundation for what has been called “value investing”. There were three problems in the way it was taught.
- It was based on the investment experience in the 1930s that made both Graham and Dodd wealthy.
- Perhaps because of the constraints of a one-hour class, we were instructed to disregard inventories in our valuation and the recalculation of book value when restructuring balance sheets. This was a good first cut, but some finished product inventory had value. Also, debts could and were renegotiated to lower amounts.
- The third set of missing elements were the items not on the balance sheet. For example, long-term leases on valuable locations, railroad right of ways, new valuable products under development, immature customer relationships, physical and other location advantages.
In my discussion with the good professor, he discarded my questions related to growth. What I now realize is that he was essentially teaching a course on the use of accounting statements for investing. These are necessary, but insufficient.
Today, a price/book value or tangible value is a paper cover of a book, not the book itself. Far too many investment reports state the relationship without detailed analysis.
Positives
The largest positive is that we have probably been in a recession for all of 2022, and possibly longer. Months later, NERA will identify when the official beginnings of the recession. Regardless, time spent on the way down eats into the time in recession, which on average lasts 32.5 months or a median of 27.1 months.
The JOC-ECRI Industrial Price Index fell -0.44% this week because port delays got shorter and container rental prices dropped.
Both biotech/pharma and electronic technology are on the verge of exciting new products. For example, Apple’s AR headsets could open a new stream of products. (Apple is owned in personal accounts.)
Due to China launching its fourth super-carrier, defense procurement spending will eventually rise.
What to Look For?
I don’t know yet, but these are some of the things I am looking for:
- Long-term survival skills. This means cutting some things to improve efficiency, but not a critical new product or service.
- Investing in the right client relationships
- Developing the right international friends
- Securing the right financial relationships.
Final Thought
Is there a timing connection between the extreme AAII bearish reading of 59.3% and the recognition we are in a recession?
Please share your thoughts for the next great investment idea.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2022/06/are-markets-getting-too-far-ahead.html
https://mikelipper.blogspot.com/2022/06/pick-investment-period-strategy-weekly.html
https://mikelipper.blogspot.com/2022/06/mike-lippers-monday-morning-musings-how.html
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