Statistics vs. Influences-Analysts vs. AI - Weekly Blog # 785

 

Mike Lipper’s Monday Morning Musings

Statistics vs. Influences-Analysts vs. AI

 

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

 

 

 

Raw Materials

When my grandfather entered the brokerage business in the early 20^th century there were no named analysts, only statisticians.  I believe the New York Society of Security Analysts (NYSSA) was founded in 1937 as one of the first local luncheon meeting groups. (Many years later I was elected President of this the largest analyst group in the world.)

 

A statistician deals with numbers, usually the limited amount published by companies and perhaps market measurers. Analysts however, as with military and commercial intelligence gathers, guess as to critical non-public information. One of the things I learned in the US Marine Corps was that before undertaking an assignment it is helpful to make a list of Essential Elements of Information (EEI). I was never given enough time to complete the list before moving out to accomplish the mission.

 

Perhaps it is ironic that some of the financial community, through the wonders of search programs on fast computers, are retrogressing to becoming statisticians.

 

The rest of this blog is devoted to possible influences that can lead to investment conclusions not connected by Artificial Intelligence relationships, perhaps because no one has made those connection in written texts. As with EEI, some of the influences do not lead to correct results but should be examined anyway. A wrong connection can prove to be inaccurate, but useful in improving the road to the right solutions. (This is often of great value to Caltech’s later research successes.)

 

Leading to Useful Conclusions

 

Possible US Stock market Direction

1. 83% of 2023’s gains in the S&P 500 thus far come from only 5 stocks.
2. Large market-capitalization stocks now have a preferred position. Year-to-date large-cap mutual funds have on average gained +9.85%, mid-caps +3.28%, and small caps +1.56%.
3. While a greater number of shares on both the NYSE and NASDAQ traded this week at rising prices vs lower prices, there were more stocks going down in price than up in both markets.
4. Do Treasury Bill yields predict inflation averaging 4.29% for the next two years, then dropping to only 3.69% over the next ten years?
5. A number of companies are in the process of meaningful transitions, probably suggesting their past financial statements are not particularly useful in predicting their future earnings power or stock price (Goldman Sachs, T. Rowe Price, and Disney are examples).

 

Where is the US Going?

The future belongs to the youth, as is usually the case. An upbeat hope was expressed for them by David Solomon, CEO of Goldman Sachs, keynote speaker at the NYU Stern School baccalaureate graduation. The brief talk was of interest to me for two reasons. First, it was the commencement for a grand nephew of mine. Second, Goldman Sachs is an investment in my client and personal account portfolios, which have performed well but is going through a difficult period as it restructures. While his comments were directed at the graduates, they also had relevance to Goldman Sachs and those in the investment business.

 

His comments are summarized briefly below:

• Life is a marathon
• Enjoy the hustle
• Good enough, isn’t
• Choose excellence
• Like connecting with people
• Spend time in pursuit of life’s goals
• Work longer
• This generation is going to Mars
• Focus on where to learn

 

A very different view can be gleaned from a survey of young people looking for their first job. The following are characteristics of what they are looking for and the percentage who want it:

• Flexible hours (68%)
• Retirement contributions (34%)
• Mental health benefits (28%)
• Student loan assistance (28%)
• Unlimited time for PTO (27%)
• A 4-day work week (26%).

 

China

1. Household bank accounts = $6.7 Trillion, which is greater than Japan’s GDP.
2. Private companies employ 90% of urban employees.
3. 20% of 16–24-year-olds are looking for jobs
4. The Central Government of China is holding meetings with governments in Central Asia. (The C5 counties of Kazakhstan, Tajikistan, Kyrgyzstan, Turkmenistan, and Uzbekistan. (All former members of the Soviet Union.) These countries are part of the critical rail and truck roads to transport both Chinese products and the natural resources of these countries. However, Chinese suppression of the Muslim Uyghur population in their Xinjiang region could cause problems. I believe the US will be involved with Ukraine for a long time as it is one of the critical players in the Black Sea, which along with the Caspian Sea is the western front for the C5 counties and China.

 

Working Conclusions

Even if you think you are just investing in the US, you are investing globally. Because critical linkages are between people, not texts, we are going to need more and better analysts throughout the world.   

 

 

 

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Current and Future Views are Confusing - Weekly blog # 756

 

Mike Lipper’s Monday Morning Musings

Current and Future Views are Confusing

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

            

 

 

Current Sentiment Too Bearish?

Perhaps it is a COVID hangover or just the collection of largely negative inputs, but the numbers appear to be too negative. As a relative long-shot player, the growing number of largely negative elements suggests crowding, which is normally wrong.

 

To me, the single biggest negative for the next year or so is China. Looking at both US and Global Growth, if China can't grow 5%, can the rest of the world grow 3%. In my opinion, the key is whether the Chinese government will let its private sector expand at a 5 % annual rate.

 

Historically, one of the best guides to US consumer growth is how well Whirlpool (*) is doing. They have just announced a material cutback in domestic expectations, among others doing the same.

(*) A very long-term personal holding that has paid for lots of appliances over the years.

 

Last week, more US stocks rose more than fell. While the Dow Jones Industrial Average (DJIA) rose +8.21%, the more significant S&P 500 gained +4.91%.  This suggests more interest from the public/wealth management retail managers than from institutional money. Traditional market analysts have been waiting for the latter group to finally dump their holdings.

 

A possible answer to global inflation is only likely when severe and growing economic/social imbalances are addressed. This requires finding appropriate compromises, with solutions not likely to be acceptable to all. What magnifies the problem is envy, not the differences between people.

 

The genius of l776 was not the beginning of the American Revolution, but Adam Smith's publication of "The Wealth of Nations". Adam Smith made the point that nations can possess superior trade talents. They can and should trade with each other, valuing their respective superior skills. He was in favor of utilizing specialization as the source of trading profits.

 

Smith’s view is what made trade between the United Kingdom and the American colonies work. That is, until the Home Country wanted the Colonies to pay for their own defense and administration. Instead of allowing the Colonies to develop more of their own services and leadership, they imposed the cost of the most expensive army and navy in the world on them. Failure to allow the Colonies the opportunity to command was a classic failure of geo-politics.

 

Geo-politics is the art of various political forces cooperating to accomplish their own goals. Since the first development of armed forces, neighboring power centers could either fight each other or trade harmoniously. Early in the development of the single land mass encompassing the connected parts of Europe and Asia. Largely due to the military power of mounted troops.

 

Asia was conquered by the Mongol tribes as they pushed both south and west, occupying much of today's Russia, China, and India. Russia and China pushed back, with Napoleon and Hitler later trying unsuccessfully to push back further. Ukraine was an independent and viable state at times, with a significant population of Tartars. Stalin largely moved the Tartars out when he was in control. Through time Ukraine developed its own culture and religion. They also developed great scientific and mathematical skills.

 

Western European countries in search of raw materials developed African and Asian colonies. Germany only became unified later and had few opportunities to acquire foreign colonies. They accepted Britain's rule of the waves until roughly the middle of the 19th century. At which time, Then, German Admiral van Tirpitz began building up their fleet to become the second largest. He along with the German general’s staff also developed their geo-political thinking, analyzing both the land and sea battles of the American Civil War.

 

Although the American navy fleet was a poor third, President Teddy Roosevelt had it tour the world after the Spanish American War in the early years of the new century. American foreign policy pivots on domestic politics, with a strong tendency toward being isolationist. However, as early as 1890, American Admiral Alfred Thayer Mahan advocated for the US Navy controlling the open seas by forcing its way into various seaports and channels. He foresaw the eventual decline of the royal navy.

 

After "TRs" presidency, the US isolationist attitude of Presidents Taft and Wilson caused the USN's budget to be reduced. Furthermore, under Wilson the US stayed out of WWI until 1916. This probably sped-up the Russian Revolution and reduced the US' s practical role in the peace treaty. The consequence of which led to the beginning of WWII and our unpreparedness for the war, particularly with submarines.

 

Going back to Adam Smith's views, you do not need to go through naval and military adventures to establish sensible trade negotiations, as long as you have the desire and skill to accomplish them.

 

Applying these efforts to Ukraine is of greater importance today than in the past. Ukraine is one of the key players controlling the Black Sea, the location of Russia's only warm water port. As a result of the breakup of the Soviet Union, Kazakhstan and a number of other former Soviet Union independent mid-continent states want to export their mineral wealth and energy through the Caspian Sea and various pipelines. Additionally, Kazakhstan has a global airport with good connections to Asia and Europe. China on the other hand is counting on its rail connections to move freight into Europe and beyond.

 

The above history and its potential impact on the world advocates for the US needing to play a strong partner role in Ukraine and the mid­continent. Thus, I expect we will be there for a long time.

 

 

 

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https://mikelipper.blogspot.com/2022/10/fundamental-changes-occurring-weekly.html

https://mikelipper.blogspot.com/2022/10/are-we-there-yet-weekly-blog-754.html

https://mikelipper.blogspot.com/2022/10/begin-to-dollar-cost-average-equity.html

 

 

 

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Three Worries: April, Near-Term Slowdown, and Long-Term Euro/Asia - Weekly Blog # 731

                                    

Mike Lipper’s Monday Morning Musings

Three Worries: April, Near-Term Slowdown, 

and Long-Term Euro/Asia

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

April’s Bear Market

Our last blog labeled the three most popular US stock indices with their media pundit titles, which now need to be revised based on this week’s performance. Using the size of the drop from previous high points:

DJIA           -10.39% Correction

S&P 500           -13.82% Correction Continued

NASDAQ Composite  -24.18% Bear Market*

                  

*From 11/12/21 Peak

While the two more senior historic indices have not confirmed a bear market, retail sentiment for the next six month is extremely bearish. The American Association of Individual Investors (AAII) latest weekly survey summary indicates a 59.4% bearish view. This is the deepest bearish percentage I remember. (As a contrarian who is often premature, I am looking forward to a rising market in the indefinite future.) There were 989 new lows for the week on “the big board” and 1570 on the NASDAQ. Investors should be alert to sharply rising stock prices the morning after a down day, where over-leveraged short positions were liquidated by custodians. 

With short-term rates rising, borrowing costs have risen sharply and apparent levels of liquidity are drying up. Toward the end of the month a number of major companies reported earnings that were disappointments. This was due to lack of demand, excess inventory, supply shortages, and an unfavorable mix of workers with questionable skills and attitudes willing to work. Returning to the office is proving to be more difficult and expensive than many thought. No wonder many viewed April as a bad month.

Berkshire Hathaway - Annual Meeting, 1st Quarter, & Best Portfolio Analysis Lab

Berkshire hosted its first physical annual meeting in three years, publishing its first quarter report and providing insightful portfolio analysis. I regularly attend the annual conference, both as a portfolio manager of accounts owning positions in the Berkshire and personally as a long-term shareholder. I left Omaha with a number of insights I would be pleased to discuss privately with subscribers. The following are briefs of those views:

1. The long-expected transition is underway, from an exclusive focus on speaking roles by Warren Buffett and Charlie Munger, to speaking roles by the two Vice Chairs. Additionally, there was the election of a couple of younger directors.
2. The leadership of value-oriented stocks is slowing on a relative basis. In the first quarter, insurance operations and their investments produced poorer results. However, it was expressed that results would be better in the future based on greater use of technology and better training. Furthermore, the railroad needs to improve its results through better training and the possibly of only engineers on trains. While the remainder of the operations also produced acceptable results, some operations experienced supply shortages and slower sales than expected. It would not surprise me that some activities over inventoried, which led to first quarter sales being less than planned. Perhaps as a result, there were no stock buybacks in the month of April.
3. Not surprisingly, investment losses were reported in the first quarter. As a partial offset to these declines, Warren Buffett purchased 9.5% of Activision for the company in an arbitrage operation. (The significance of this is that it was a replay of a formerly regular activity.)
4. In a recent fund manager’s survey, the majority of portfolio managers favored value-oriented securities or loans for the rest of this year. The very current experience at Berkshire does not vigorously support the idea.

My personal conclusion is that Warren Buffett and Charlie Munger are managing the company as if it were a Trust for their and other long-term individual shareholders’ heirs, making Berkshire Hathaway a perfectly sound holding, but not necessarily attractive as a new position. 

History Suggests Ukraine’s Invasion Purposes?

For centuries the European-Asian land mass has been the prize that militant leaders and religions have sought, with a passive and submissive Ukraine an important safeguard. Historically, Russians have believed that control of the continent was providence, first with the “Popes” in Rome, then Constantinople and finally Moscow.

Aggressive leaders - Genus Kahn, Napoleon, Hitler, and Putin believed it, as did students of geo-politics. Where does Ukraine fit in? To control commerce in the Black Sea there must be friendly powers on all its coasts controlling the wealth in the ground in Central Asia, which includes Kazakhstan, the former Soviet provinces, and Iran. The Russians already have a naval port in Syria to protect access to the Black Sea and trans-Asian pipelines. Turkey recognized this threat and recently prohibited Russian flyovers to reduce the strength of Russian forces in Syria. Kazakhstan is also worried. The other big player in the region is China. China sees itself as an exporter of both manufactured goods and some raw materials to their preferred markets in Europe and Africa. There are two transport routes, one through and around Africa and the other by train across Asia and Europe. With the potential for mile-long trains crossing what used to be Russian territory, safe passage is critical. You can see that if the Black Sea is not in friendly hands, the dream of a dominant Russia is dead. I may be completely wrong, but one can see Putin’s motivations.

Questions: Do any of these thoughts suggest different investment strategies to you?

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

https://mikelipper.blogspot.com/2022/04/on-way-to-bottom-weekly-blog-730.html

https://mikelipper.blogspot.com/2022/04/short-long-term-thoughts-weekly-blog-729.html

https://mikelipper.blogspot.com/2022/04/is-this-great-investment-era-ending.html

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A. Michael Lipper, CFA

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