Mike Lipper’s Monday Morning Musings
Solo Messaging is Meaningless
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
“The Floor” No Longer Helps
Years ago, on both the New York and London stock exchanges, it was normal
for members to query the assigned market-makers for a supply/demand picture on
a stock they were trading. When the system worked, specialists supplied the
size of supply/demand and their opinion on the next expected price needed to
clear trading levels. This system worked reasonably well until the “upstairs”
trading desks of some member firms began competing for institutional size
orders.
At that point floor specialists believed they no longer had an exclusive
information advantage. Consequently, when approached for a “picture” on a stock,
they were reluctant to reveal any orders left with them. It quickly became
clear from their responses that they were describing their own positions, or
“talking their own book”. This was far less helpful in understanding where the
real market was and the prices necessary to clear nearby trading levels. Over
time, this left the floor to the upstairs trading desks for stocks with
institutional size interests. This led to a situation where those without good
relations with the institutional trading desks were at a disadvantage. Increasingly
they were isolated from the flow of business.
The same thing happened to the distribution of news on the economy, where
the distribution of economic news became increasingly biased. Today’s biases
are so strong that a substantial amount of the current “news” has lost its
usefulness for investment decision making, or should have.
A Small Example with Larger Implications
Friday’s trading was lack-luster. The three most popular stock indices, the
Dow Jones Industrial Average, the Standard &Poor’s 500 Index, and the NASDAQ
Composite, all moved fractionally. The movement was so small that the combined three
movements only totaled 0.34%. The Wall Street Journal ran the headline “Major
Indexes Eked Out a Gain…” (The WSJ is better than its competitors.)
My problem with this is that the Russell 3000 gained the very same 0.34%.
(The Russell 3000 tracks the performance of the 3000 largest stocks, including
those in the DJIA, the S&P 500, and most of the NASDAQ.) The person writing
the headline at the WSJ was giving some comfort to bullish investors and those on the political left.
The Missed Opportunity: The Dichotomy
The WSJ also published articles on three other factoids:
- “Supermarket giant drops Pepsi and Lays over price increases”
- Xerox cuts workforce by 15%.
- WSJ weekly prices of commodities, stock indices, ETFs, and currencies had only 16% of them rising.
The dichotomy is that while most of the left-leaning media is full of
happy talk about expanding the economy, businesses are cutting back on people,
locations, inventories, and some prices. One might say they are preparing for a
recession, or stagflation. The bulls and bears not talking to each other, which
is not a sound position for making investment decisions.
Stocks to Buy for Different Times
In the WSJ weekly price chart, the
fifth largest gainer was Healthcare. This is a sector heavily owned by
institutions which has not seen many gains. Money-making opportunities look
good considering the increasing amount of healthcare needed to be funded, independent
of the cyclical economy for pharmaceuticals and health related services.
Once the economy bottoms Energy producing corporations will see demand
rise, which should last for several years. One way to play this is through
accounts + personal holdings in Berkshire Hathaway. (BRKA & BRKB will
benefit from a large portfolio of petroleum stocks and ownership of operating
utilities.)
We also serve investors who have multi-generational payments ahead of
them. One of the few ways to play this is through stocks and funds invested in
Africa and the Middle East. One of the classical ways to invest is to buy sectors
under current price pressure. We think the Chinese region is well worth
developing a long-term investment view.
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