How to Find the Answer - Weekly Blog # 810

 

Mike Lipper’s Monday Morning Musings

 

How to Find the Answer

 

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

 

 

First, recognize that one does not have the answer to the problem. In my case, and for most others, I do not know what the future holds for the world, our economy, the “market”, or my accounts and my investments. Second, search for a source of greater knowledge. Taking from the folklore of the racetrack, “smart money”, a guide to an advantaged decision.

 

The term smart money comes from the Damon Runyon era, when private bookmakers gave odds and took bets on horseraces. The odds that they quoted were the odds the bettor received if they happened to win. This was the traditional way of doing things in Great Britain and other places. In the US, various state governments saw a way to generate revenue from betting activities. They required the tracks to pay them a relatively small portion of the winning bets, alongside what the tracks themselves charged, for a combined total “take” of around 15% of the winnings.

 

Illegal bookmakers offered two services, taking bets over the phone and rather being forced to attend the track, running a banking operation by extending credit to the bettors. If the money bet by their customers was differently balanced than the money bet at the track, the bookies might not have enough customer money to meet the winners’ expected payments. To reduce this risk, the bookies evaluated their exposure late in the 30 minutes before each race. They then communicated to a trackside associate to bet enough money on the probable winner to reduce the likely payoff odds to an amount they could afford. The minute this balancing operation was activated, it became visible on the tote boards. Some would recognize what was happening and choose to join the so-called “smart money”. Riding on someone else’s thoughts sometimes pays off.

 

Applying the Smart Money Approach

Each week I scan both the volume of shares and how they are divided between rising or falling on the NYSE and NASDAQ. I pay particular attention to any meaningful difference between the two major marketplaces.

 

The media proclaimed this past week a rising market because the three major stock market indices rose. However, there were more shares sold at declining prices than at rising prices. The New York Stock Exchange gets more media attention than the NASDAQ because the dollar value of shares listed is larger than that on the NASDAQ. However, some of the volume on the NYSE is not as professionally managed as that on the NASDAQ market. (The NYSE has more individual investors and more institutions with smaller and less competent research staff). In the latest week, 70% of the NYSE declined vs 64% on the NASDAQ.

 

The smaller decline is likely due to more growth-oriented stocks trading on the NASDAQ. Also, the big market-cap energy companies trade on the “big board”. (In the week ended Thursday, mutual funds primarily invested in natural resources fell -5.62%, while growth stock funds gained +2.69% on average.

 

Accumulation or Distribution

Another attempt to find “Smart Money” is technical, market, or price analysis. The theory is that smart money acquires (buys) investments when they are cheap and distributes (sells) them when they are overpriced. Few investors openly declare what they are doing.

 

Many market participants can be labeled as either optimistic or pessimistic. For the most part optimists believe many of the problems facing us will be addressed successfully in the near-term, usually in under one year. They are buying because in part they believe that near-term earnings will rise. The pessimists don’t have confidence in the near-term, they believe there is still near-term risk at current stock price levels.

 

If one quickly divides most stocks into growth and value, there were two new elements revealed this week. The weekly report on US rail (freight) traffic fell 1.7% on a year over year basis. Seven out of ten types of freight declined for the week, with only three rising. Visits to various shops show that many items are no longer being carried.  Smaller in terms of direct economic impact but psychologically more important is Apple’s (*) announcement that they are raising trade-in prices for old devices, including Androids. They are doing this to aid sales of their own phones, while perhaps supplying the overseas market with cheaper phones, particularly India.

*Owned and managed and personal accounts

 

Lessons from History

There are many lessons from the Depression we continue today, such as the almost guaranteed death and debts of WWII. As a Marine I am very aware that the best and perhaps only way to achieve long-lasting peace is to prepare for war, which we are not.

 

A second lesson from someone who is older than the two leading candidates for the US Presidency is that their ages should not be the main reasons to approve their second chances. Their history as young and not so young men is enough to disqualify them. More important is that our political system allows them to be candidates which we should correct. There are many senior people older than the two “young seniors”, like Charlie Munger who could do a better job.   

 

 

 

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

Mike Lipper's Blog: Preparing - Weekly Blog # 809

Mike Lipper's Blog: Indicators as Future Guides - Weekly Blog # 808

Mike Lipper's Blog: Changing Steps - Weekly Blog # 807

 

 

 

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