“Straws in the Wind”: Predictions? - Weekly Blog # 890

 

 

 

Mike Lipper’s Monday Morning Musings

 

“Straws in the Wind”: Predictions?

 

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

 

                   

 

Predictions

Ever since humans have thought about the future, they’ve looked for clues about what the future might hold. Since very few stocks can be purchased and converted back into cash immediately with a profit on the first transaction day, equity investors are essentially betting on one or more perceived futures. All we can do is guess what may happen.

 

Since regulators frown on future predictions, particularly those that guarantee future events, investors and analysts scan both the past and views of the future to guess what may happen. The following are brief thoughts which may help subscribers think about the future.

 

From the Past

In 1934, the US Congress passed the Reciprocal Trade Agreement Act giving the President (FDR) the ability to negotiate reciprocal trade reductions. (FDR, with the help of his “Harvard Brain Trust”, was authorized to accomplish this mission. While they proposed tactics from the left, the current President may draw his approaches from the right. Both could be labeled “activists”.)

 

Today, the History Channel showed a two-hour program devoted to The Crash, The Depression, and FDR's actions. It was well produced, simplistic, and narrow, but the key facts seem to be accurate.

1. FDR's 1932 Presidential election had surprising support from Republican leaders J.P. Morgan Jr. and DuPont, the leader of GM.
2. FDR blamed the Crash and subsequent Depression on Wall Street and Banks.
3. FDR turned on them, which changed the way the economy worked.
4. The economy was not in condition to fight WWII at the beginning of the war.

 

As we have been told "History does not repeat itself, but rhymes." In general, there are two types of recessions, cyclical and structural. The latter takes longer.

 

2025

A year ago, very few analysts and perceptive investors would have guessed which four mutual fund peer groups would now be leading the year-to-date race. They are Precious Metals Funds +42.95%, Latin American Funds +24.50%, Commoditized Precious Metals Funds +22.60%, and European Region Funds +20.61%. The first and third are clearly based on gold, but the gap between the two appears to be unusually wide. Latin American and European funds having similar performance also seems unusual.  From an overall point of view these results suggest we have entered a new phase or cycle, with the probability that last year’s leaders won’t lead again for a while.

 

There now appears to be a need to fill manufacturing jobs on an overall basis. This is distressing for two reasons. The first is that hirers can’t find the right people who want to work in their plants. The second is that the new factories this administration is counting on will have difficulty reaching the productivity and profitability levels the optimistic people in DC expect.

 

The London Stock Exchange regularly publishes I/B/E/S estimates of S&P 500 quarterly earnings. For the quarter we are in, their earnings per share prediction is that we will gain +5.8%, while growing net income +4.3%. The +5.8% is disappointing, but the +4.3% shows how much the market needs buybacks. Moving to economic analysis from securities analysis, the low gains in net income will not generate sufficient cash to pay for capital expansion and the introduction of new products and services.

 

The weekly American Association of Individual Investors (AAII) sample survey has recently turned slightly bullish, quite a jump in three weeks. The latest week bullish/bearish readings are 37.7% and 36.7%, compared to 29.4% and 51.5% three weeks ago. Two comments are appropriate. First, this time-series has a good long-term record, although it has been wrong at turning points. Second, individual investors should not be traders who get caught up in short-term volatility.

 

2026

Venture Capital funds are having difficulty raising capital from investors and lenders. I suspect this is also true for the broader universe of private capital funds. Investors in small and mid-cap equity funds have become used to private capital funds buying their maturing holdings.

 

One commentator wrote that Warren Buffett’s Berkshire (*) sold bank stocks and has not sold any of its positions in Apple (*), Coke, and American Express (*) in its latest report. These stocks are price leaders and should therefore do relatively well in periods of stagflation.

(*) Positions held in client and personal accounts.

 

Question: What will make you transact this year?

 

 

 

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Mike Lipper's Blog: After Relief Rally, 3rd Strike or Out? - Weekly Blog # 889

Mike Lipper's Blog: Slow Moving in a Fog - Weekly Blog # 888

Mike Lipper's Blog: Significant Messages: Warren Buffett to Step Down by End of Year, Other Berkshire Insights, and Tariffs won't deliver - Weekly Blog # 887

 

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A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

 

After Relief Rally, 3rd Strike or Out? - Weekly Blog # 889

 

 

 

Mike Lipper’s Monday Morning Musings

 

After Relief Rally, 3^rd Strike or Out?

 

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

 

Preparing for Rough Seas Ahead

We had a “Relief Rally” up to the close of the US stock market on Friday. Although most stocks rose, there was a change in leadership. Many of the best performers were the kind of stocks an institutional equity player adds to a portfolio to soften declining performance in a down-market phase. The leaders did not have the characteristics of stocks leading a brand-new Bull market. Everything changed late Friday, with Moody’s* announcing the lowering of its credit rating on US Treasuries from AAA to AA1.

* Moody’s stock is held in client and personal accounts.

 

Not a total Surprise

In a May 8-13 Reuters survey, 54% of bond strategists were concerned about the “safe haven” status of US Treasuries, a critical benchmark for pricing global capital markets. In April the same survey had 47% concerned. This was not the first group of worriers.

 

Consumer confidence in May fell to the second lowest reading on record. Regarding Moody’s US Treasuries downgrade, S&P downgraded the US Treasury credit rating in 2011, as did Fitch in 2023. Thus, the move by Moody’s is the third downgrade or strike. The next critical question is the nature and length of the expected decline.

 

Moody’s Answer

According to Moody’s statement, US credit “retains exceptional credit strengths such as size, resilience and dynamism of its economy and role of US dollar as global reserve currency.” Not surprisingly, the US government’s view is that Moody’s is looking backwards.

 

Expecting this retort, Moody’s focused on expectations for the future. They expect the Federal Deficit to reach 9% of the US economy in 2035, up from 6.4% in 2025. Furthermore, they expect government revenues to remain broadly flat, adjusted globally from negative. (To me this sounds like stagflation, with both tax rates and inflation rising.)

 

My Call

Odds are, we’ve struck out and ended the inning, but not the game. The absence of a structural recession/depression may keep an expansion in the low to middle gains. Portfolios with over 10% in longer than 10-year Treasuries should cut them in half.

 

How do you call it?

 

 

 

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

Mike Lipper's Blog: Slow Moving in a Fog - Weekly Blog # 888

Mike Lipper's Blog: Significant Messages: Warren Buffett to Step Down by End of Year, Other Berkshire Insights, and Tariffs won't deliver - Weekly Blog # 887

Mike Lipper's Blog: A Contrarian Starting to Worry - Weekly Blog # 886

 

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.

  

 

Slow Moving in a Fog - Weekly Blog # 888

 

Mike Lipper’s Monday Morning Musings

 

Slow Moving in a Fog

 

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

 

                             

 

Weather Predictor’s Real Function

One should pity the role of weather predictors who must often predict changes in the weather, either by hour, day, week, month, or year. One or more of their outputs are frequently wrong because something changes. As a professional chartered financial analyst (CFA) I am both grateful and sympathetic to their plight.

 

The only thing they can be confident of is making securities analysts look good, having a somewhat worse prediction record than the analysts. The primary reason they are wrong is that something changes. As both surviving analysts and politicians are prone to say, when the facts change, my views change.

 

To safeguard my self-confidence, I rely on a weather condition. A fog has descended on the economic and securities playing fields. We will be in such a situation this week and looking forward to the future. Since managing and owning a portfolio, “facts/sentiments” change every minute, hour, day, week, month, or year. It is more like navigating a vessel than a piece of statutory. Dangerous risks in a fog are unidentified shoals or obstacles, as well as warning elements which occur randomly.

 

Friendly Signals

• Many Chinese believe that 888 is a lucky sign of the future.
• The American Association of Individual Investors (AAII) latest weekly sample survey showed a decline in bearish readings and an increase in bullish readings.
• 54% of the weekly readings of the prices of indices, currencies, commodities, and ETFs in the WSJ were higher.
• Unusual trading volume on Friday was the highest of the week.

Warning Signals

• The Financial Times noted that “Institutional Money Managers are trimming US exposure...”
• The US Federal Government is expected to cut-back “Watchdogs at the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency and the Securities and Exchange Commission.” (Beneath the surface, there appears to be concerns about the soundness of small banks and private debt instruments.)

 

Mixed Messages

When a stock price drops about 1% following a corporate announcement after it was expected to rise, either the expectation was wrong, or some didn’t understand the message. This is particularly true when the stock and announcer are both among the best practical educators in the investment world. I am referring to the drop in the price of Berkshire Hathaway* after Warren Buffett announced his intention to ask the Board to approve his resignation as CEO, effective year-end.

*Berkshire Hathaway is held in both client and personal accounts and is the largest holding in some of the later accounts.

 

Warren Buffett has said for years that the stock price would likely rise after he retired, and I shared his views for a couple of reasons. First, his retirement would eventually happen and second that he was running the company for the heirs of the shareholders. With that in mind, he ran the company in a low-risk fashion. In many, but not all ways, Berkshire was a trust account for the shareholders’ heirs.

 

His long-term friend and vice-chair, the late Charlie Munger, taught him not to buy cheap stocks on a price basis, but good companies at fair prices. Charlie called Warren a learning machine because he learned every day, particularly from losses. This reinforced the teaching of Professor David Dodd at Columbia, who taught the Securities Analysis course based on his experience in the Depression. This was perfectly appropriate for the times, and he was still focused that way in the mid-1950s when I took his course.

 

The course was essentially an accounting course using financial statements. It took me a number of years to learn the other key lesson, the business analysis of the issuer. This knowledge was one of Charlie Munger’s contributions to Warren. After Charlie passed a few days before his hundredth birthday, the likelihood of Warren’s own retirement became more likely.

 

His retirement became possible with the appointment of Greg Able, who is much more of an operating manager than a securities manager, which Berkshire neglected in my opinion. Recent sellers of the stock were likely worshipers of “Mr. Buffett” or possibly the heirs of long-term holders who now felt free to capture the assets for their own needs rather than wait for the passing of their relatives. They have probably never read anything about Berkshire’s investment thinking. Thus, I do not believe they are informed sellers.

 

How do you see things?

 

 

 

 

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

Mike Lipper's Blog: Significant Messages: Warren Buffett to Step Down by End of Year, Other Berkshire Insights, and Tariffs won't deliver - Weekly Blog # 887

Mike Lipper's Blog: A Contrarian Starting to Worry - Weekly Blog # 886

Mike Lipper's Blog: Generally Good Holy Week + Future Clues - Weekly Blog # 885

 

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.

 

Significant Messages: Warren Buffett to Step Down by End of Year, Other Berkshire Insights, and Tariffs won't deliver - Weekly Blog # 887

 

Mike Lipper’s Monday Morning Musings

 

Significant Messages: Warren Buffett to

Step Down by End of Year, Other Berkshire

Insights, and Tariffs won't deliver

 

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

 

                             

You have probably already heard that Warren Buffett will step down as CEO of Berkshire Hathaway by the end of the year. Warren announced this to thunderous applause at Berkshire's annual meeting on Saturday afternoon. I am not surprised. At the meeting, which is the first we have not attended in many years, his answers to many questions were more statesman like, recognizing the scope of problems facing both the country and the rest of the globe. He referred to his Father's only political defeat as a Republican Congressman and subsequent re-election. Greg Able spoke purposely, answering an increasing number of questions. He will succeed Warren as CEO.

 

The following brief comments were delivered at the meeting largely in chronological order.

1. Berkshire expects the relationship with Japanese trading companies to likely lead to more Japanese acquisitions, probably in Yen.
2. Berkshire was in discussion for a $10 billion deal recently. Buffett indicated that he thought with Abel as CEO larger deals are likely, with more communication between the units.
3. Currently, the companies are not using AI for Real Estate and they are behind in using it for GEICO.
4. There is a global push for weaker currencies, which is a negative.
5. Life Insurance is different from the Property/Casualty insurance Private Equity is using.
6. Berkshire's stock price has fallen 50% three different times.
7. In the latest quarter, the prices of 21 subsidiaries rose and 29 declined.
8. There were no repurchases of stock.
9. Warren pays more attention to balance sheets than income statements. He is particularly interested in generation of free cash flow. He also believes quality starts from the top. There was quite a discussion about utilities, coal, and fires. The various states and political interests need to decide what they will authorize.

 

Tariffs Are Not the Answer

Far too many people believe that imposing Tariffs on various items of world trade will solve the problems of individual countries. George Calhoun, a Director at the Stevens Institute of Technology and a contributor to Forbes Magazine, raises critical questions in two articles in Forbes. (George and I serve on a board committee at the Stevens Institute.) For brevity purposes I will briefly review the first part of his second article:

 

Will higher tariffs cause inflation?

Prices will rise.

 

Alternative view:

Currency shifts neutralize price increases

 

Mitigating factors: Caveats, Fudges, & Assumptions'

There are at least 14 various measures of annualized inflation.

 

Is it really inflation?

"High prices are not the same as inflation"

There is confusion between the rate of change and the level of prices. (I may include the perception that there is no change in the quality of product or service and time of delivery.)

 

Tariffs affect only a small portion of the "The Consumer's Basket"

(Does substitution change the value of the product?)

 

(I am happy to send the second half of George's article to any subscriber.)

 

The Trump Angle

From the very first time the President introduced the use of tariffs to correct the imbalance of world trade, I believed he was doing it to force negotiations. It is already clear he will change the size of barriers, due to the manipulation of currencies. (See currency shifts above.)

Only the most senior officers can deal with these types of items.

 

 

Question: As usual I would like to hear your views.

 

 

 

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

Mike Lipper's Blog: A Contrarian Starting to Worry - Weekly Blog # 886

Mike Lipper's Blog: Generally Good Holy Week + Future Clues - Weekly Blog # 885

Mike Lipper's Blog: An Uneasy Week with Long Concerns - Weekly Blog # 884

 

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.