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