Mike Lipper’s Monday Morning Musings
How to Find the Answer
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
First, recognize
that one does not have the answer to the problem. In my case, and for most
others, I do not know what the future holds for the world, our economy, the
“market”, or my accounts and my investments. Second, search for a source of
greater knowledge. Taking from the folklore of the racetrack, “smart money”, a
guide to an advantaged decision.
The term smart money
comes from the Damon Runyon era, when private bookmakers gave odds and took bets
on horseraces. The odds that they quoted were the odds the bettor received if
they happened to win. This was the traditional way of doing things in Great
Britain and other places. In the US, various state governments saw a way to
generate revenue from betting activities. They required the tracks to pay them
a relatively small portion of the winning bets, alongside what the tracks
themselves charged, for a combined total “take” of around 15% of the winnings.
Illegal bookmakers offered
two services, taking bets over the phone and rather being forced to attend the
track, running a banking operation by extending credit to the bettors. If the
money bet by their customers was differently balanced than the money bet at the
track, the bookies might not have enough customer money to meet the winners’
expected payments. To reduce this risk, the bookies evaluated their exposure late
in the 30 minutes before each race. They then communicated to a trackside
associate to bet enough money on the probable winner to reduce the likely
payoff odds to an amount they could afford. The minute this balancing operation
was activated, it became visible on the tote boards. Some would recognize what
was happening and choose to join the so-called “smart money”. Riding on someone
else’s thoughts sometimes pays off.
Applying the Smart
Money Approach
Each week I scan
both the volume of shares and how they are divided between rising or falling on
the NYSE and NASDAQ. I pay particular attention to any meaningful difference
between the two major marketplaces.
The media proclaimed
this past week a rising market because the three major stock market indices
rose. However, there were more shares sold at declining prices than at rising prices.
The New York Stock Exchange gets more media attention than the NASDAQ because
the dollar value of shares listed is larger than that on the NASDAQ. However,
some of the volume on the NYSE is not as professionally managed as that on the NASDAQ
market. (The NYSE has more individual investors and more institutions with
smaller and less competent research staff). In the latest week, 70% of the NYSE
declined vs 64% on the NASDAQ.
The smaller decline
is likely due to more growth-oriented stocks trading on the NASDAQ. Also, the
big market-cap energy companies trade on the “big board”. (In the week ended Thursday,
mutual funds primarily invested in natural resources fell -5.62%, while growth
stock funds gained +2.69% on average.
Accumulation or
Distribution
Another attempt to
find “Smart Money” is technical, market, or price analysis. The theory is that
smart money acquires (buys) investments when they are cheap and distributes (sells)
them when they are overpriced. Few investors openly declare what they are
doing.
Many market
participants can be labeled as either optimistic or pessimistic. For the most
part optimists believe many of the problems facing us will be addressed
successfully in the near-term, usually in under one year. They are buying because
in part they believe that near-term earnings will rise. The pessimists don’t
have confidence in the near-term, they believe there is still near-term risk at
current stock price levels.
If one quickly
divides most stocks into growth and value, there were two new elements revealed
this week. The weekly report on US rail (freight) traffic fell 1.7% on a year
over year basis. Seven out of ten types of freight declined for the week, with only
three rising. Visits to various shops show that many items are no longer being carried. Smaller in terms of direct economic impact
but psychologically more important is Apple’s (*) announcement that they are
raising trade-in prices for old devices, including Androids. They are doing
this to aid sales of their own phones, while perhaps supplying the overseas market
with cheaper phones, particularly India.
*Owned and managed and personal accounts
Lessons from History
There are many
lessons from the Depression we continue today, such as the almost guaranteed death
and debts of WWII. As a Marine I am very aware that the best and perhaps only
way to achieve long-lasting peace is to prepare for war, which we are not.
A second lesson from
someone who is older than the two leading candidates for the US Presidency is
that their ages should not be the main reasons to approve their second chances.
Their history as young and not so young men is enough to disqualify them. More
important is that our political system allows them to be candidates which we should
correct. There are many senior people older than the two “young seniors”, like Charlie
Munger who could do a better job.
Did you miss my blog last week? Click
here to read.
Mike
Lipper's Blog: Preparing - Weekly Blog # 809
Mike
Lipper's Blog: Indicators as Future Guides - Weekly Blog # 808
Mike
Lipper's Blog: Changing Steps - Weekly Blog # 807
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Michael Lipper, CFA
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