Previously I have
written about the eventual trap of arrogance. Most politicians, and many
investors will not admit to making critical mistakes. I try to be different.
The only thing I promise each of our accounts is that I might make mistakes
that hopefully I correct before there is too much pain. My main defense against
arrogance is that I try to learn something new every single day. I have
suggested this pattern to my children and grandchildren. The power of the new
idea, new view, and new approach is that it forces one to relate the new with
the old - and that becomes a challenge to many of our beliefs. Just this week,
I have knowingly been exposed to at least five new elements to my thinking. All
of these have a global context.
Logistics
lead, but need to be interpreted
Last week I commented
in my blog about what I learned from our visit to Mount Vernon. First, that
steamship volume was increasing and that I saw many trucks from logistics
companies going south on the Interstate Highway. This week a friend of mine
noted that in September, the Baltic Dry Index moved from 662 to 778. What was
even more encouraging is that the spot rate for the largest-sized vehicles
carrying dry cargo (for example, iron ore) skyrocketed from around 2000 to 7600
this week. I believe the surge noted in iron ore shipments is due to the
announced efforts to build many subway systems throughout Chinese cities. (As
someone who for most of my life lived in and around New York City, the idea of
relieving the roads of the clogging, expensive, and pollution generating car
traffic seems to be a great idea.) To me the materially-increased infrastructure
investment in China is a very practical stimulus that will use imported iron
ore to make steel in local Chinese mills, a very intelligent way to address its
economic slowdown.
A careful searcher for
truth will almost always find some contradictory evidence. One of the oldest of
all technical (market) indicators is the belief that the Dow Jones Industrial
Average cannot make and hold new high levels if the Dow Jones Transportation Average (which used to be composed of just
railroads) does not confirm by making its own new high. The belief is that if
the two indexes diverge they will have to find a bottom before there can be a
successful sustained new high. This week the Norfolk Southern Corp. lowered its
expectation for the current year’s earnings. The Dow Jones Transports declined
on this news. The decline’s impact on the industrials needs to be put into
perspective. The railroad is one of the largest shippers of coal in the
country. Just as governments can attempt to make companies grow; e.g., solar and
wind power, it can force lower sales of others. The Obama administration, along
with much lower natural gas prices, is making coal an unattractive fuel for our
electric utilities. Fuel for the electric utilities is not being delivered by
train, but by pipelines, barges and other vehicles. Thus, as of this week I
believe that we are seeing some resurgence in industrial activity, which the
stock market is already discounting.
Cash
to stock is becoming an easier switch
Last week I attended
two investment focused meetings. In the first a large regional bank gathered
some of its best potential and actual investment clients to a private lunch
to hear my views on investing. They would not have taken time from their busy
day if they were not already investing in equities or considering it. In our
conversations they recognized that long-term they needed to be significantly
exposed to the world of stocks, perhaps through funds. Everyone at the lunch
could recite, in detail, their concerns about the stock market, but they still
came and stayed for two hours. One
evening last week I was at a post-meeting dinner for a board on which I sit. At
one point during the long dinner, a very successful second generation Wall
Streeter leaned over to me to tell me he had not bought a common stock for his
own account for over two years and now he was ready to buy. I suggested that he
call a mutual friend of ours with whom he had successful business dealings, to
help him reenter the market. He noted on his pocket pad to call our friend in
the morning. These two instances suggest to me that the historic pattern of
people coming into the stock market as it goes up is holding. While some of the
easy money has already been made in the low volume markets, there will be
opportunities at higher prices.
‘Tis
the season to be “Vixed”
Many commentators have
spent much time noting that there appears to be a low level of fear expressed
in the options on the S&P 500 as captured in a traded index with the symbol
of VIX, (CBOE
Market Volatility Index). If one reads Randy Forsyth’s article in
Barron’s Friday September 21, we should be prepared for problematic markets. I have
lived through the October “crashes” in 1978, 1979, 1987, and 1989 but not the
big one of 1929. What I had not compiled were the other autumn events that were
dangerous to one’s capital base. As today’s global stock markets are reacting
to government manipulated fixed income markets, recognition of the following Autumn
occurrences is important:
1.
September 24th 1869: the US
government sold gold to break the
“corner” that was attempted by Jay Gould and Jim Fisk.
2.
September 20, 1873: the New York Stock
Exchange closed due to a panic.
3.
September 21, 1931: Great Britain’s
suspension of the pound’s link to gold.
4.
September 21, 1985: the so-called Plaza
Accord broke the ascent of the US dollar. (Too bad to bring that
wonderful grand hotel into another round of government manipulation.)
5.
September 16, 1992: The withdrawal of
Sterling from the European Exchange Rate Mechanism and reportedly a huge
winning bet by George Soros.
6.
September 23, 1998: the culmination of
the Asian currency crisis which began in July 1997.
7.
September 11th, 2001: the attack
on the World Trade Center in NYC.
8.
September 15th 2008: the
collapse of Lehman Brothers followed the next day by the near collapse of
AIG.(These were much more significant in the global fixed-income markets than
in the stock markets.)
Long-term
fears and where you hold your investments
Ray Dalio, the founder
and co-CIO of
Bridgewater Associates in an interview with CNBC had some dark thoughts. His fear is that after
a ten to fifteen year managed depression (austerity without growth), that the social
tensions between various economic and ethnic classes in southern Europe may
produce an appeal to some strongman/woman to take over and solve the problem;
e.g. the appeal that brought Hitler to power. Much closer to home, a savvy
investor shared her concerns with me. She is worried that in the US (and by some
extent in other Western countries and Japan) that the medical and related costs
of keeping the elderly will be too much for the younger tax paying generations
to tolerate. A financial class war is what she is predicting.
I asked this smart,
experienced lady how she was preparing for this with her portfolio today. In
general she had foreign investments for 30-40% of her portfolio. But the bulk
of the rest was in multinational companies. She uses Coca Cola as an example,
which gets most of its earnings from outside the US. I am not sure that her
strategy will deliver against her fears or those of Mr. Dalio.
For many years I have
complained to various fund managers that displayed their portfolios on the
basis of the statements they receive from their custodians. The custodians list
securities on the basis as to where the entity is legally domiciled. From an
analytical standpoint, I am interested where the company is making most of its
operating profit. That is the country or region which will have, in general,
the biggest impact on sales and operating earnings. For regulatory reasons I
will probably won’t win this argument with published reports but with careful
analysis I can probably guess the key sites of operating earnings power which
should help in determining the strategic value of the investment. However, the
concerns expressed by the lady and Mr. Dalio raise another issue.
If our current fears
turn us into a refugee mentality, it is not where an entity makes its money
that is important, but where are the assets and where can they be traded in a
period of distress. If these fears become somewhat more widespread, we may see wealthy
US investors move to vehicles that are beyond the problem areas.
Which
comes first: weak currency or weak military will?
A study of history suggests
that a weak military will eventually invite others to seize our assets and
possibly our lives. Often the decline in military willingness to aggressively defend
its homeland comes from a policy of weak currency management as it attempts to
take market share away from trade counterparties by having lower prices than
they do. For a generation we have seen that many Europeans will not support a
strong military; e.g. in the Balkans, and we also see that the value of their
currencies decline. While much has been written about Quantitative Easing
Infinity, in terms of US stimulation, on
a longer-term basis the decline in the value of our currency is in effect a
weak dollar policy. Combining our planned Asian withdrawals and defense
expenditure cutbacks, a weak dollar policy is going to invite more trouble. As
much as we don’t like to be negative, maybe we need to pay more attention to
our worriers.
The bottom line: be
careful and stage your money into equity vehicles with some concern as to where
your assets are being housed.
What Do You Think?
In
London
I will be
conducting interviews and investment manager meetings in London during the week
of October 8 - 12. If you would like to meet to discuss investments,
client strategies or one of my blog topics, please email me at aml@lipperadvising.com
.
Blog
email
Email deliveries of my
blog last week contained only the post’s title with a hyperlink to the complete
blog, requiring readers to make an additional click. Unfortunately, Google changed its procedures
without notifying us.
_____________________________
Did
someone forward you this Blog? To receive Mike Lipper’s Blog each Monday,
please subscribe using the email or RSS feed buttons in the left column of MikeLipper.Blogspot.com.
Please
address your comments to: Email Mike Lipper's Blog.
Posts
