Before Focusing on Shorter-Term Reactions - Weekly Blog # 950

 

 

 

Mike Lipper’s Monday Morning Musings

 

Before Focusing on Shorter-Term Reactions

 

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

 

          

 

 

We should recognize that several topics that arose this week will have longer-term implications and impact results for many years, if not future decades. None of these contributions to our thinking will influence things directly, but some or all may influence our future.

 

Smoke from the Canadian wildfires has blanketed much of the US. Sports activities were delayed in Philadelphia, and the World Cup game in Miami was also influenced. The important message is that the US is not an isolated country, activities in both Canada and Mexico have measurable impacts on us.

 

The World Cup competition introduced real America to many sports fans from all over the world. Prior to traveling to the games many people looked at the US as Manhattan below 60th street, a few government buildings in D.C., and some sound stages in California. Costco, Brooklyn, and our national parks have awakened them to the country’s beauty, its friendly people, and a large population of many talents. It also showed athletes playing their game better than those representing America. I suspect by the next World Cup we will produce better results too. The biggest change is likely to be in women’s soccer.

 

Our media and our President comment on “the stock market” as if it were singular. Furthermore, the direction of the market is aligned with the economy. Increasingly, “the market” is made up of several smaller markets moving differently from each other. For most of this year, important sections of the market have been pointing down compared to a limited number of tech companies going up. The stocks of some of the nation’s leading healthcare companies are selling at 1990 or 2000 prices. These companies are rarely mentioned by pundits or politicians. In future it would be wise for investors to participate in the growth of Asia, and later Africa and the Middle East.

 

The final US input may be a collection of groups in Congress having only titular relations with the two main parties. The main battle will be in the Senate, which takes 60 votes for most legislation to pass. However, neither party will be able to count on all its members due to some issue specific deserters. This could lead to the only functioning group being a conflicted White House ruling through executive orders in all agencies except the Fed.    

 

Clues To the Future

The Three Jobs

Security Analysts essentially have three jobs. The first job is to avoid being tagged with losing money, or worse, having a negative relationship with a paying client. The second, and most common function, is to be associated with winning positions or clusters of winners. The third job is to successfully support the sales effort of the organization.

 

What is our Role?

First and foremost, our first loyalty is to our investment management clients. If we are reasonably successful, we then earn the privilege of sharing our views with others through this blog.

 

We Use this Blog to Shape our Thinking

The price action of common stocks did not give us much help last week. In general, the daily moves were equally balanced between gains and losses. However, the latest sample survey of the American Association of Individual Investors (AAII) had their six-month expectations swinging a bit positive. (The AAII survey does not cover the end of the week, and many market analysts treat it as a contrary indicator at “turning points”.)

 

Our Biases

We think we do a good job over an extended period for long-term investors. In our longest multi-generational account of sixteen positions, five holdings represent over 50% of the gains. This demonstrates that most of the time we prefer both a small list of holdings and the ability to let winners exceed the SEC’s definition of diversified. Our accounts consist of both common stocks and mutual funds, or the manager’s portfolio. We also own securities that invest overseas, which are appropriate positions for this account, but may not be for others.

 

Some Hints for Long-Term Buyers

Two very popular stocks, IBM and Space X, which we do not own, declined this week. Both have lessons we believe are important for long-term investors. The fall in IBM was caused by the company’s disclosure that their software, consulting, infrastructure, and main frame computer customers are switching to buying “chips”. While pundits focused on what they were not buying from IBM, the item that struck me as even more important was the decline of items tied to main frame computers. IBM was responsible for selling some 60% or more of these expensive devices. In future there will be some consulting and infrastructure sales, plus an ever-decreasing number of mainframes. Furthermore, they no-longer have the advantage of being the first computer company with “sales engineers”. IBM is not the company that my grandfather loved. The lesson for all of us is that even one-time great companies can have economic difficulties. There is not a single company remaining from the original Dow Jones Industrial Average (DJIA), with the majority of them no longer in business.

 

At the other extreme, Space X is a business with exciting future products and services which also declined this week, selling below its original public issue price. In our role as portfolio manager we do not invest in highly sought after IPOs.

 

Despite the problems associated with these two leaders, the number of advancing prices on the NASDAQ exchange were higher than the number of decliners this week. However, on the older New York Stock Exchange (NYSE) the reverse was true 46% vs 59%.

 

Question: What if anything I have said do you agree with? 

 

 

 

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

Mike Lipper's Blog: Little Occurred During the Trading Week - Weekly Blog # 949

Mike Lipper's Blog: Searching for Future Long-Term Picks: Gathering Assets, Reasons to Search - Weekly Blog # 948

Mike Lipper's Blog: What is Pending and When - Weekly Blog # 947

 

 

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Super Bowl Derivatives Results Can Teach About Second Supply Cycle Impacts

• Sports betting trends can provide investment insight
  
• Derivatives acceptable to US
  

Betting on The Game

For Americans, the most watched television this year was the Super Bowl, a championship football game between the Green Bay Packers from Green Bay, Wisconsin and the Pittsburgh Steelers from Pennsylvania. The game was watched by an estimated 111 million viewers. This impressive number is about 1/6th of the audience for the World Cup. As much of the interest in the World Cup started in English-speaking countries, where waging and bookmaking are established traditions, betting sizeable amounts of money is normal.

While Americans bet substantial amounts of money informally in various office pools on sports, (including the results of the Super Bowl game), the only state that allows sports betting on team results is Nevada. Many Americans view the use of derivatives for stocks and bonds with disfavor, however derivatives appear to be acceptable in the sports gaming world. My local newspaper informed me that if I chose, I could bet on at least 16 different aspects of the game, including the length of time the singer of the National Anthem held the last note, as well as the time of the first successful pass by each quarterback. I am reasonably sure as a client-focused industry, that almost any sort of bet at given odds would have been accepted. The people who book all of these myriad of bets are well-schooled odds-makers that set the betting spreads narrow enough to entice the betters and wide enough to make money. As with other analysts, the odds-makers analyze all the available past records and current available information and rumors. (One can see why I was intrigued with becoming a bookmaker as a kid growing up in an era when neither individuals nor instruments of the state were allowed to accept bets. Thus, I had to accept second best and join the investment community, where odds-making and spreads were common practices.)

What Happened in 2011?

The same local newspaper informed me that while some $ 90 million was bet with the sports books on the Super Bowl game, it was not a great business success for them. As good analysts and with the results that did not surprise, I suspect that the odds-makers got their spreads right. What may have surprised them was that the volume of betting was not up to the expected levels, thus their calculations of overhead absorption were faulty. The avid fans of the Green Bay Packers were too small in number compared to those of Manchester United in the UK or any of the major eastern National Football League teams in the US. I suspect that the betting spreads will widen for the 2012 game, if there is one.* Whether the larger spreads will detract from the level of the betting is not known, but is probably unlikely. What is likely, based on historical odds, is that the return on the winning bet will not be as good as this year’s. It is this change in payout odds that is a change factor in the second supply level that was the focus in last week’s blog .

* For many years I have had the pleasure and honor to advise the defined contribution plans for the National Football League/ Players Association. As almost every American sports fan knows, the current collective bargaining agreement ends on March 3rd, 2011. If a strike/lock-out occurs, all of the individual player contracts would end. What the teams would then do is not known, but it is possible (but highly unlikely) that no Super Bowl game will be played in 2012. I wonder what odds the Las Vegas Sports books will be on that outcome or whether the UK bookmakers will offer a wagering facility on whether there will be a Super Bowl in 2012.

Derivatives are OK

All of the above suggests that many Americans accept the use of derivatives if they understand the terms of the trade (which may not have been clear to them in the financial community’s instruments).

Applying the Second Supply Cycle Concerns to Gold

In response to last week's blog, one member of our blog community questioned whether I thought the gold market was real and that a collapse is inevitable. The simple answer is no to both questions. However, the wise investor in gold, (and there are many), should understand that there are two levels of supply and demand for gold (and other investments as well). I believe the fundamental value of gold is as a contra asset to the world’s paper currency, but principally to the US dollar. The fundamental long term trend in the price of gold will pivot off the supply of US dollars in global circulation and the purchasing power of those dollars. These considerations will push the first level of demand, where supply will be driven by production which is quite low and the dis-hoarding from central banks and private investors. The second element of supply includes the various ways one can access the gold price-coins, (conversion cost to bullion) options and futures (with counter party risks), exchange traded funds holding gold and/or gold mining stocks with production and political risks among other considerations.

I can perceive an unexpected increase in margin rates, tax changes, and transportation or custodian difficulties exciting current owners to dump their holdings. This would be a situation where, at least on a temporary basis, the second source of supply could overcome the reasonable price level created by the primary demand.

Dear Reader: Nothing in this world is absolutely inevitable, with the exception of death and taxes.

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