The Week That Wasn't - Weekly Blog # 902

Mike Lipper’s Monday Morning Musings

 

"The Week That Wasn't"

 

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

 

 

 

History or Not

TWTWTW (Was the abbreviation for "That Was The Week That Was". The British had a somewhat comical review of critical news, with jibes at our doings or non-doings. In a number of ways this past week was one of increased anticipation of the steps toward smoothing out some of our problems. The most critical was a cease fire in Ukraine, which would be a step toward ending the killing in that war torn country, and would also influence global economic trends. These results were expected to lead to more sales in the US and abroad, allowing the Fed to lower interest rates.

 

At the so-called summit in Alaska the two antagonists spent three hours restating existing positions but found only some unannounced agreement on how to reach a ceasefire.

 

At the same time a collection of US central bankers met to discuss economic policy, which to most of the public was encapsulated to mean changing the short-term Federal Funds rate. The official topics to be discussed were demographics, productivity, and immigration’s impact on changing the US job market.

 

Some available data points indicate that early in the next century the US population will peak. Long-term labor productivity is largely driven by education, beginning at the earliest school and home days through the graduate levels. Education is lacking appropriate leadership and funding. In the past, immigration brought us hard-working, intelligent people, a trend that could now be reversing.

 

What is the Data saying?

The following are some data points I am reading, in no particular order:

1. This being an investment blog it is important to note that the bottom of the US stock market occurred in 1929, before depression analysis officially began. This suggests the stock market may be an early warning signal.
2. The "Taylor Rule" predicts the Fed funds rate. It states the current Fed funds rate of 4.5% should be 5%.
3. Deere reduced its revenue estimate. Farm income was in a recession before the depression, and it was one reason for passage of the Smoot-Hawley Tariff. (I believe one reason the current Fed has been reluctant to lower interest rates are the many smaller midwestern and western bank loans and the feelings of their senators. Jamie Dimon is also concerned that it is difficult to quickly take over community banks under present rules.)
4. Jerome Powell is looking at the impact of tariffs on business services excluding shelter, which appears to be rising faster than other measures of inflation. In the month of July business services rose 1.4%.
5. Over the last 3 weeks the AAII sample survey’s bearish projections have risen to 46.2% from 33.0%.
6. Each Saturday The WSJ measures the prices of 72 items. In studying the data, I have noted that the single largest gainer or decliner often results from an unusual market factor. Consequently, I look at the second biggest gainer or loser and look at the spread between the two. In the latest week S&P 500 Health Care rose +4.62% while Comex Gold sank -3.00%, a spread of 7.62% which looks normal.
7. In the week ended Thursday, the best performing mutual fund peer groups were those unpopular for most of this year. (This suggests for the moment that there is safety in unpopularity. If you are looking for the best odds, bet on a material change. All three of the small company categories: growth, core, and value show promise.

 

Working Conclusion

Beneath the surface there is a lot happening, both in the long-term (the next century) and from a trading viewpoint. One should pay attention to quiet markets.

 

 

 

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More Evidence of New Era - Weekly Blog # 874

 

Mike Lipper’s Monday Morning Musings

 

More Evidence of New Era

 

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

 

 

 

For some time, I have viewed US and global markets as having entered a “New Era” phase. As with any transition, until it is complete it is possible the trend will not finish and reverse to the old happier trend. The self-appointed job of this analytical observer is to regularly make observations as I see them.

 

The Rise of the Investment Manager

Independent custodians who are also not investment managers are losing influence with the owners of capital. I see assets leaving bank custodian/ investment managers and going primarily to investment managers who custody their own assets or contract out the custodian function. One clue is this week’s announcement that the head of JP Morgan Chase trading is joining an independent hedge fund. Insurance companies have been reducing their direct management of institutional equity assets and hiring independent equity managers.

 

At the World Economic Forum it was recently noted that the number of individual Trillionaires will shortly grow from one to five, if not more. This is more a function of concentration than growth in the market. Part of the problem is the growth of business investment being small to flat after the impact of inflation. One of my concerns is the anticipated AI flows going into various “sales channels” and making them more efficient, rather than increasing the number of units sold. One disturbing factor is the size of the global R&D budgets, excluding inflation, being relatively flat over the last five years.  

 

US Education a Particular Problem

Global growth is often the result of a better educated workforce. While the US has the largest and most expensive “educational” system in the world, it is not producing a workforce that measures up on the world stage. (The reason for the quotes around education is that in the US we have substituted education for schooling, which uses “social promotion” or teaching to pass the test rather than teaching students how to think logically.) Mike Bloomberg, the former Mayor of NYC, points out that only 67% of 8th graders scored at the basic or better reading level, the lowest level since 1962. What I find more distressing is that only 60% of 4th graders pass a basic math test. This is not going to help over half the US population in the “AI” world.

 

Investors are Worried

In the latest week of generally bullish projections 51.7% of the stocks trading on the NYSE went down, which was surpassed by the NASDAQ where 58.2% declined. The regularly published sample survey of the members of the American Association of Individual Investors (AAII) showed 41% being bullish, down from 43.4% the prior week. What may be more significant is the percentage of those being bearish rose to 34.0% from 29.4% the week earlier.

 

Walking Around Analysis

I know a number currently unemployed people of all ages with good resumes and work histories, who are having difficulty getting hiring interviews. Fewer and fewer companies are hiring. When I walk through high-end shopping malls, I find the better stores understaffed. When speaking to operating people in profit and non-profit organizations, they say they are experiencing measurable declines in operational efficiency. They point to their organizations and/or their suppliers being hollowed out by absent workers of all levels from senior management to first level people.

 

One wonders how long growth in the economy and markets can continue with a poorly educated workforce who all too frequently are absent from work. In the near future companies will have little alternative other than to use AI to compensate for this decline in productivity. The tragedy will be the millions of uneducated and unmotivated employees left on the sideline because they can’t compete. Education in America is desperately in need of a solution, hopefully a new administration claiming to be in search of excellence can deliver it.  

 

As an analyst I suspect the interim results this year will disappoint.

Please tell me if I’m wrong.

 

 

 

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Roundtable Discussion - Weekly Blog # 873

 

Mike Lipper’s Monday Morning Musings

 

Roundtable Discussion

 

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

 

 

 

We at Lipper Advisory Services feel a deep duty to all of our clients and those for whom we have an investment responsibility. I’m currently taking advantage of a visit from my son Steve to collaborate and will be working with Steve and Hylton to produce this week’s blog. Most money invested in the United States and many other countries is for long-term purposes. While the media focusses on short term results, we tend to look long-term and only use short-term inputs if it helps in making long-term decisions.

One of the critical determinants of investment results is the size and nature of the population. Recently, the Congressional Budget Office issued a long-term forecast on the size of the population that was lower than prior forecasts. This is very important but it is only one of several critical forces that will produce results. One of my concerns is that most populations will shrink and only a few countries will enjoy future population growth. The real force that will drive investment results will be the thinking of not only investment professionals but also of investors. 

In this light I am personally very concerned that most educational systems operating in the world are producing poor results in terms of preparing people to produce adequate lifetime savings. These issues start from pre-K through PhD education. This issue is especially important because most people generate the bulk of their savings through their work efforts.

    

I think that there will be some tremendous investment opportunities over the next ten years but wonder how the median member of the population will do. My concern is that few will be prepared with the necessary thinking, savings and discipline to identify and take advantage of these opportunities.

 

My path as an investor

To the extent that I have done reasonably well as an investor, it’s because I have stayed within a zone that I understand reasonably well. Warren Buffet calls this a “circle of competence”. I tend to focus on areas that other people are not focused on. However, there’s a challenge in that most of the areas not being followed actively are currently unattractive investment opportunities. An investor needs to bring something else to identify real opportunities. They need some in-depth understanding of the reality of the underlying business. That being said, it’s possible some opportunities will be in securities markets and countries I have not had direct experience with.  

 

I hope that Hylton and Steve will share what they are thinking about concerning these issues. It will be a source of future guidance. 

 

 

Steven Lipper

I agree that both demographics and education are important factors for long term investors to consider. My father has trained me well as a contrarian thinker. I think demographics running in the opposite direction of the typical view is an important issue for equity investors. It’s inarguable that a country’s long term economic grow is tied to its population growth (more precisely, to total hours worked, but that’s another topic). 

 

But as equity investors we are not buying future economic growth we are buying future profit growth.  There’s a counter-intuitive dynamic I’ve seen as a small company investor. When there’s a shortage of labor business owners invest more in productivity enhancing processes and equipment. They are forced to do this in order to meet rising orders with a flat employment base. And that increased productivity often increases profits, stocks prices, and workers income. So, as an equity investor I am not pessimistic about the lower projected growth rate of many countries’ populations. Differences in results will come from how countries incentivize investment. 

 

With regard to education there’s much to say but let me focus on the investment implications and opportunities resulting from disappointments in our education system. I expect that for most people post-secondary “education” will evolve to having a greater focus on certification. By certification I mean learnable skills which are in demand by employers and can be verified through testing. These certifications, if awarded by respected organizations, are valuable signals that employers can use to reduce risk in the hiring process. 

 

Certifications also benefit from the dynamism of market forces as in-demand skills will translate to in-demand certifications, providing signals to people to add those certifications. The expanding pool of people with in-demand skills will in turn support companies’ growth and people’s opportunities. I also expect on-line certifications to be less prone to many of the scandals of on-line colleges, as there will be a clear standard and a faster feedback loop. Some investment opportunities should be available for innovators in this area. 

 

Hylton Phillips-Page

Sadly, young people today save very little. Reasons for the lack of savings range from simply being unable to make ends meet to a sense of entitlement for a certain lifestyle. We live in a world where the pace of technological change is both exciting and terrifying at the same time. Technology will allow us to solve many of life’s problems but will also cause significant dislocations in society as robots and automation replace many human functions. Those jobs will likely be replaced by different types of jobs, as they have in the past. Keeping abreast of the opportunities and the skills needed for them is perhaps the best advice we can give to young people preparing for the workplace. This is a time where savings would be helpful, as young people will need all the help they can get in preparing for a future which requires an ever-changing skill set.

 

For those with investable cash it could be an exciting opportunity to invest in those companies leading the change. We are at a major inflection point in history, similar to the industrial revolution or the introduction of the internet. Artificial intelligence (AI) and robotics will significantly improve productivity and change the way we approach solving these problems. They will of course improve corporate profits too. Quantum computing is at an early stage of development, promising to solve problems in a fraction of the time it takes today. Increased energy needs will be at the center of it all, as (AI) requires as much as five times the energy of a search not using AI. Last but not least, we have a new political administration promising to reduce regulation and speed up the investment and development process. So, there are a number of force multipliers all occurring at roughly the same time.

 

However, you should be aware of the challenges of investing in technology stocks.

• One of the biggest challenges is an even better technology coming along and making your technology obsolete.
• The technology could fail to live up to expectations.
• There is often a first mover advantage that makes it difficult for others to follow.
• There are a number of very large and well-funded technology companies that have the resources to be in any business they desire by investing. They will likely have more money and resources to invest than small start-ups. If all else fails, they often buy out the competition.  

 

The dominant performance of the “magnificent seven” is perhaps symptomatic of this change occurring in the market today. However, there are also many smaller companies embracing new technologies and they are likely to emerge as leaders in the future. Successful investing requires keeping abreast of the companies best adapting to the future. Professional portfolio managers and research analysts are in the best position to identify them. 

 

 

 

 

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Need For a Correction Decline - Weekly Blog # 801

 

Mike Lipper’s Monday Morning Musings

Need For a Correction Decline

 

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

 

 

 

Need For a Correction Decline

Long-Term investing includes long-term up or down trends, some periods of stable prices or stagflation, and peaks/valleys. We will travel through each. There are both market and economic cycles. The steepest is when market and economic cycles roughly coincide, or when the market cycle slightly precedes the economic cycle. All important cycles are due to imbalances exploited by traders taking advantage of the rest of the market. As we have not had a corrective cycle for many years, I believe we are due.

 

There are many recognized imbalances, but I am focusing on one generalized area called demographics. Demographics involve people in terms of numbers, earnings, births, deaths, recognized skills, education and perhaps recognized political leanings.

 

In our last blog we dealt with national productivity at the individual level. We already pay attention to total national productivity. Most developed countries are experiencing declining numbers of workers due to age. This has been a major concern throughout history in terms of the ability to put large numbers of citizens in uniform. Increasingly, a high percentage of the population (77%) are not deemed suitable for military service in the US, although the US Marines have been able to meet their enlistment requirement. Due to physical condition, education, criminal record, or attitude, the majority are not suitable to protect their homes or allies. (As you read this blog, ask yourself how many young people you know would volunteer to join if we suffered a September 11^th, 2001 type attack. I suggest one of many reasons for their attitudes are expressed in their schools and homes. American citizens and our allies should be worried.)

 

Other concerns

Lack of useful leadership throughout society has resulted in people seeking corporate and government solutions for major problems. This has led to a collection of politically skilled CEOs who are not good operational leaders. Very few of these leaders are prepared to commit to the kind of periods we enjoy with private companies and institutions.

 

One example occurred this weekend when I unexpectedly spent a few days at a good local hospital receiving treatment. A single medical officer commented that hospitals had become understaffed when COVID reduced their critical support staff.

 

This past week saw poor results in the financial industry. Three measures, including the NYSE and NASDAQ, saw over 70% of their listed securities decline in the weekly WSJ price results for markets, commodities and currencies. There will eventually be positive operational results, but probably not until major senior managements are changed.

 

Please share your views and correct me where I am wrong.

 

 

 

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Some Past Errors Create Future Problems - Weekly Blog # 798

 

Mike Lipper’s Monday Morning Musings

Some Past Errors Create Future Problems

 

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

 

 

 

Employers can't find suitable candidates to hire due to both faulty education and attitudes toward work. This is one of the reasons the US is losing the productivity of labor battle. In at least 16 states a large percentage of students are failing third grade reading tests e.g., 60% failed in Tennessee. (In our machine era, if you can't read instructions, you can't operate various machines.) I suspect that teachers are taught to teach to the test, test scores are used for hiring, and schools are retaining teachers in union jobs.

 

Teachers should be teaching students how to use information to gain knowledge. This is not what is happening today. (A classic example is a problem I had with my late daughter. She drove me crazy with her disability, which caused her to have problems adding a simple column of numbers correctly. So, I changed focus and concentrated instead on how she kept track of spending money. She always had money in the bank and her bills were always paid. In explaining it to me, she said that was easy. She said she was conserving the money by keeping it intact at the bank, while we paid her credit card bill. Thus, she was the best money manager in the family. The key was that she figured out what none of her teachers or aids did. The teachers need to learn to teach life lessons.)

 

The biggest problem with what is being taught is the integrity of our history, which pivots on one word: Tariffs. People don't like paying taxes. Politicians throughout history have given popular reasons why people should make these payments, without focusing on the real reasons. Three examples in US history still hurt us today.

 

The “Boston Tea Party”, staged by American Colonists dressed as Indians, threw the first shipment of taxed British tea into Boston Harbor. The Colonists were protesting the payment of a tax without being represented in the British government. The truth of the matter was that Lord North, an unpopular British Prime Minister, needed to pay for a six-year war with the French to protect the American colonies during “The French-American War”. Lord North and many in England thought that America was costing too much. It was being totally financed by revenues derived from goods purchased from “The Mother Country”. The Tea Party thus became one of the initial political events leading to the American Revolution.

 

The second misappropriation embedded in our history is the Civil War. In this weekend’s Wall Street Journal there is an opinion piece by Jim Webb, a US Marine Officer who served in Vietnam and a Secretary of the Navy. He was also an independent director of a respected Mutual Fund. In the article he commented that there were very few confederates who owned slaves. He also noted that more slave owners fought for the North than the South. Yet it remains a popular belief today that the war was about slavery. In truth, the war was about tariffs. The North wanted high tariffs to protect its manufacturing, while the South wanted low tariffs to aid the British who were major buyers of their’ cotton and were suppliers of cash to the Confederacy.

 

Post Civil War through the Wilson administration, Americans were fed a political diet about slavery. For about the fifty years this was happening, the German General Staff made many trips to study American war battles, particularly battles in the Shenandoah Valley with Stonewall Jackson. The study of these battles played a critical role in both WWI and WWII, particularly in their attacks of the ”low countries”.

 

I also believe the German underground political movements in the US led to delays in the US entering both world wars, despite British efforts. (The US recognized the importance of the war and placed its War College in Pennsylvania, hoping to understand both battles and the infrastructure challenges.)

 

The third misappropriation is still taking place today, with the last two administrations selectively using tariffs for domestic political purposes. These tariffs caused inflation that was importantly paid by low-income people. The current administration is attempting to hurt Republicans by damaging corporate earnings through the restriction of sales, while at the same time trying to raise labor union wages and their contributions.

 

With All This Good News-How to Invest?

Like Ronald Regan, “I won't exploit my opponent’s youth and inexperience”.  Neither party is serving up a long-term leader or a set of policies. Most people can see through their own accounts that there is no great future for them. Around the world young people have lost confidence in the "system".

 

With most equities around the world declining in real terms, one should consider a careful plan to dollar cost average into the markets. The more China suffers, the more attractive long-term investment in China becomes. Foreign car companies will benefit compared to ‘the big 3”, as the UAW forces prices higher.

 

Recognizing my COVID Brain does any of this makes sense.

 

 

 

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My Triple Crown - Weekly Blog # 783

 

Mike Lipper’s Monday Morning Musings

My Triple Crown:

Berkshire, Coronation, Derby, plus analytical insights

 

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

 

 

 

Berkshire Hathaway Annual Benefits

One of the advantages of owning shares in this unique company, both personally and professionally, is having the opportunity to learn from Warren Buffett, Charlie Munger, Greg Able, and Ajit Jain. The side conversations with a number of deeply involved investors and managers is an added benefit. For me, my wife, and my son Steve, this is truly an educational experience.

 

In terms of Berkshire, the following is a brief list of short-term (one year) comments:

1. The “float” is expected to be higher than in 2022. There should also be earnings from the railroad.
2. They have heavy property insurance exposure in Florida real estate.
3. GEICO will not be getting the full benefit of the switch to fully automate until at least 2024, possibly longer.
4. The stock is selling below “going-concern value”, suggesting it’s a good use of cash, particularly for heirs.

 

Coronation

While the coronation of King Charles III and Queen Camilla is important to many in the English-speaking world, it is also important to those of us entrenched in the investment world. King Charles produced a more modern version of the over 1,000-year-old coronation with all its pageantry and significance. Globally, he should give us hope we can remodel a financial system showing serious signs of disarray, with the inability to produce good value for all direct and indirect participants. Among which are the problems related to regional banks, commercial real estate, government sponsored inflation, inadequate education, inefficient healthcare, and getting the optimum benefits from layoffs. (More on the latter subject later in this blog.) We should learn what we can from King Charles’s discipline, especially his ability to make painful decisions with a clear view of a desirable future.

 

Kentucky Derby

The Kentucky Derby is America’s most famous horse race, which is unfortunate. The entrants in the race are 3-year-young horses with very little experience. This year’s winner, like many others in the race, had only raced 3 times and had only raced once at the Derby’s distance.  As most blog readers have learned, I believe whatever analytical talents I may have, I learned at the New York racetracks.

 

The payoff after both the tax authorities and track takes their share is important in figuring out if a particular horse is worth betting on. It’s a critical element of my handicapping skill, which I carry over to my financial analysis responsibilities. Not surprisingly, Warren Buffett also learned a great deal from attending local racetracks. One can see this when he explains the key to Berkshire’s insurance success, which is getting the right spread between the rate charged and the risk of loss.

 

One of the determents in this analysis is who you are competing against. This was an unusual Derby in that a number of horses were scratched. The betting crowd (the market) was left without a strong preference or favorite, much like one of the five largest market-caps in most sectors. At the track, the odds-on favorites are often 2 to1, or less. In this year’s race the winning odds-on favorite was 4 to 1. This should have been an alert to bettors that there was a low level of confidence in the crowd’s or the market’s choices. Somewhat similar to a number of market periods we have gone through recently. This filter might have suggested giving a more earnest look at horses with longer odds. Opening up the possibility of identifying a horse with 9 to 1 odds who finished first barely beating the second finisher, a horse with 5 to 1 odds. This type of behavior is why I often favor less popular investments, including small-caps and companies with somewhat blemished records. Particularly when there is a change of jockeys or other key managers. The keys to success in this type of thinking is not the win vs. loss ratio, but the number of dollars won or lost. Or if you prefer, Berkshire’s rate vs risk.

 

Analytical Insights

Hardly a day passes without the media reporting on a company with a new layoff. This is not newsworthy because of the number of people being laid-off, but because it’s happening during a period of high employment where there’s a surplus number of job openings relative to the number of people unemployed. Clearly there is an imbalance, or phrased another way, the people unemployed are different that those employed.

 

This condition requires careful and thoughtful analysis based on incomplete data. I suggest disaggregating the layoffs by presumed causes. The following is a list of types of layoffs and their significance:

1. LIFO (Last In, First Out) is usually directed by HR people from an easy date of employment list, without any further consideration. (I avoided one such occasion personally by going to a senior partner of an institutional brokerage firm which had 5 junior analysts. I pointed out that the likely salaries in aggregate were roughly equivalent to that of one aging but knowledgeable senior analyst. Perhaps my logic or guts worked, all five junior analysts were saved. I left the firm for another opportunity soon thereafter. Of the 4 that remained, at least 2 became productive firm partners.)
2. The opposite approach is sorting by perceived talent and keeping the best. In effect create a talent bank.
3. Friends for life. As I moved up, I recognized that some talented individuals did not fit where the firm was going. I suggested they find a better place and they became friends for life.
4. A layoff can be an essential part of a plan to move an operation, disposing of an activity that no longer fits.

 

Good analysts should try to determine which of the four alternatives most likely fits their described motivation. The LIFO layoff is only helpful in improving overall short-term productivity, as it does not make the remaining workers feel good about working for the employer. This may be unavoidable if the company is a union shop with built in official or unofficial rules governing layoffs. If so, the employer has deeper problems. 

 

In Conclusion

I had a good learning week, and I am happy to discuss my views with subscribers. Whether you agree or not, I can learn from you.

 

 

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