This Weekend’s Learning Sources - Weekly Blog # 939

 

 

 

Mike Lipper’s Monday Morning Musings

 

This Weekend’s Learning Sources

 

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

 

          

 

Identifying sources of learning

One of the main differences between us and most animals is that our brains are larger, which hopefully means we can learn more. The end of this week supplied three sources of learning. The three teams of instructors were: Tim Cook (Steve Jobs), Berkshire Hathaway’s Annual Meeting with shareholders (Warren Buffett/Charlie Munger and Greg Able), and the Bettors and Horses at the Kentucky Derby. From each I can learn a lot. Matter of fact, each could be a whole semester at Business Schools instead of what they are currently teaching.

 

Tim Cook (Steve Jobs)

At the end of the so-called work week Tim Cook conducted what was his last quarterly meeting for shareholders and analysts of Apple (*). He focused on the company’s critical relationships with customers and what is owed to them. He stressed what Steve Jobs taught, the betterment of the users’ lives. These were the critical thoughts passed onto the oncoming new President of Apple. We should pass these views onto all we deal with, focusing less on what they paid us and more on what we did for them.

* Owned in personal and client accounts.

 

Warren Buffett/ Charlie Munger & Greg Able

Mr. Buffett spoke to many of the shareholders attending the annual Berkshire Hathaway (*) meeting, both in person and electronically. His advice for people reaching 50 years or older was to switch their primary investment focus from making money to capital preservation. He emphasized saying no, particularly to not well understood new investments. (I do not own any “AI” stocks directly, but there are many in mutual funds I own. The key to their future is what they have yet to produce, not what they are selling today.) He believes investors in retirement should prune their holdings and try to explain what they own to their heirs, feeling it is more beneficial to focus on how the inheritance should be used rather than the intricacies of what is owned.

* Owned in personal and client accounts.

 

Greg Able is the new President of the company and is focused on improving the operations of the company. When the talented Chief Financial Officer transitions into retirement, he will be replaced with both a CFO and a new lawyer. Furthermore, for the 31 private companies owned by Berkshire, he has appointed a trusted internal executive as leader. Instead of doing just financial oversight, he will be reviewing the operations of the formerly private companies. Good policies of the past will be reviewed to see if they are right for now.

 

My personal view is that there are two major trends which we did not have to deal with in the past, but which could be much more important in the future. The first is one of the causes of financial and economic cyclicality resulting from not repaying debt on time and at full value. Defaults on debt have led to depressions in the past and have been the cause of unplanned contractions.

 

In the decade of the 1920s into the early 1930s society encouraged the global extension of debt at the retail level, including its use as a defense against tariffs (Smoot Hawley).  Currently, we have an expanded federal debt led by someone who needed to renegotiate his own debt. Our government encourages investing retirement capital in debt. The national debt is larger than the GNP. (Old debt has a due date, while GNP is produced each year.)

 

The second dangerous trend is the value of the dollar in world trade. As debt grows, overseas investors value it less. Meaning, it not only becomes more expensive for funding our debt, but also for paying for imports of food, clothing, and raw materials. We are better positioned than many other countries who are in worst shape, but not all. Asia, which has a younger population and a disciplined workforce, is in better shape. Higher inflation leads to lower long-term value of the currency. One measure of inflation not issued by our overworked government is the ECRI Index of Industrial Prices, which was up 140.35% this week for the last 52 weeks.  

 

Kentucky Derby

I brought this on myself by stating that I learned the basic tenants of analysis at the New York Racetracks. A subscriber asked who I was betting on in the race. Where do I begin? Perhaps with two axioms. First, as with most things in life, short answers are often wrong. The short answers are wrong because they are stated without limits and conditions. That brings us to the second axiom, I don’t like losing. I don’t like losing because it is a double loss. The first loss is the sum wagered, and the second is the loss of funds necessary for future betting and other things.

 

There are two negatives against betting at the track. First, the track takes a cut of all bets and there are personal expenses of travel, admissions, and food. Second, as a game of chance it is rigged because of the track’s take. Additionally, winnings are taxable at federal and state levels. There is still another drawback, about 30% to 50% of the time the lowest yielding horse wins. Most of the time those winnings are not large enough to offset losses and expenses incurred. I address this problem by limiting the number of times I bet, usually 3 out of 9 races and rarely at the lowest odds. The advantage of this approach is staying away from betting at the lowest odds, which are the most popular horses.

 

If these issues did not cause you to find other things to bet on, the elements of the Derby might. First, the race is only for three-year-old horses. While horses are born for the record throughout the year, under racing law all horses are born on January 1st. Some horses start their racing history at 2 years old, but many do not. By the time they are three years old they are adolescent. (From a scientific standpoint it would be useful to know the actual date of birth. There is poor but available information as to the number of official races the horse has run. In terms of the Derby, the range I heard was 1 to 4 races.) For those of my age, I am reluctant to take adolescent horses and most humans seriously.

 

So, after all this I did not place a bet on this year’s Derby. Most of the time I am not interested in races for three-year olds that are run any earlier than June, which starts with the Belmont Stakes race. These races are also a bit suspect because the course has been altered.

 

I would not have bet on the winner this year. However, the trainer deserves to be congratulated as she was the first woman trainer to win the Derby. The night before she had a dam which won the Kentucky Oaks with the same jockey who won the Kentucky Derby. Quite an accomplishment.

 

All of this shows I am still a student and hope you are as well.

                                        

 

 

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

Mike Lipper's Blog: Watch Out for the Four - Weekly Blog # 938

Mike Lipper's Blog: Investors’ Interlude - Weekly Blog # 937

Mike Lipper's Blog: Not Yet Ready for a long-term Solution - Weekly Blog # 936

 

 

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Failed Expectations: Do Details Count? Zig-Zag Flips - Weekly Blog # 925

 

 

Mike Lipper’s Monday Morning Musings

 

Failed Expectations

Do Details Count? Zig-Zag Flips

 

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

 

 

 

Was this the week that was?

Last week’s blog anticipated a ruling by the US Supreme Court on the Presidential use of Executive Orders to impose tariffs on countries and products. It was further expected that the President would use substitute measures to accomplish similar goals if he loses the Supreme Court case. Additionally, there was a belief that the government would be forced to repay the existing tariffs to the American people (voters). The new tariffs would probably cause some changes by foreign nations. None of this happened.

 

Instead, the major topic of conversation at the World Economic Forum at Davos was Greenland. Discussions moved at lightening or Trump speed from a military occupation to a not fully disclosed peaceful agreement with NATO forces by the end of the week. The importance of these dramatic changes reminds us of what may be topic one in developing future investment strategies. All of this brief history shows how wrong we can be. What we missed was the significant price level change that occurred this week.

 

Critical Price Changes

Starting with the least followed ECRI industrial price index, which normally moves ploddingly. The index rose to 126.28 from the prior week’s 120.49. The jump raised the year-over-year gain to 6.58%, which is greater than the various inflation measures the Fed and many others use. I would not be surprised to see industrial buyers of products add this amount to their resale prices, after adding an insurance amount to protect their profits against further prices increases.

 

One explanation of ECRI prices can be found in the weekly price chart in the weekend Wall Street Journal, which showed Natural Gas rising +70.0% and Silver +14.57% for the week. Part of these increases could be for increased use of these items in the normal course of business. However, I suspect some of the increased demand comes from trading and/or gambling interests, either on the long side or from covering short positions. The importance of the last sentence is that the size of the trading and gambling sectors is growing, and I believe it’s already quite large.

 

The third price increase impacts all of us in our daily purchase of goods and services. It is the value of the dollar. On Friday the 16th of January the US dollar index was 99.395, one week later it was 97.599. The President has threatened foreign countries if they sell US assets!! (I personally believe this won’t happen, but it shows a sensitivity to the value of the dollar, even though Trump and Xi have both advocated for a lower value of their currencies as mercantilists.)

 

Warning

I have already indicated how wrong I can be. Please be careful in developing your own investment strategy and make changes slowly, not abruptly.

 

 

 

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

Mike Lipper's Blog: Is This The Week That Ends Instability? - Weekly Blog # 924

Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923 Mike Lipper's Blog: Data May Be Signaling Change - Weekly Blog # 922

 

 

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A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

Politics Follows The Market, Not the Other Way Around

This weekend my wife and I drove down to Mount Vernon, the ancestral home of George Washington. For many years Ruth has been a member of “The Life Guard Society.” This is a fund and friend-raising group to support the preservation and enhancement of our first president’s estate and image.  The name Life Guard comes from the group of 150 officers that successfully protected General Washington against personal violence. In other words they were the forerunners of today’s US Secret Service White House force. The purpose of the meeting was to celebrate the acquisition of Washington’s personal copy of a book called the Acts of Congress. This book contains the Constitution, the Bill of Rights and legislation that was passed in the first year of his Presidency. What makes this particular copy extremely illuminating is that it also contains the President’s own notes and concerns. A glance at his brief comments shows he was concerned about presidential powers. His concern was to understand the separate powers of the President, Congress, and the Supreme Court. (He was the only President to appoint all nine of the Justices.) 

After the celebratory dinner there was discussion as to the importance of the written record of both the Declaration of Independence and the Constitution. Thomas Jefferson, one of the principal authors told Washington that there was nothing new in these documents as they expressed ideas that came from the Bible, ancient Greeks, and various philosophers. Once again this view gives me an opportunity to disagree with the third US President. What was new was not the words or thoughts, but that a diverse group of politicians and a few statesmen could and did agree with these principles and literally pledged their lives and assets in support of them.

The enacted political decisions of these 18^th  Century men became possible only when they believed that there was support for these ideas and ideals on the part of the people. This is a clear example that politicians and many governments will only move when they deem to have some, if not total support. The old line is that the job of a politician is to find a parade and get in front of it.

What does this history mean for investors in 2012?

I have previously written about being in despair at various learned investment committee meetings with the consensus wanting to hold off making fundamental investment decisions until various elections throughout the world are in the record books. I humbly suggest that is a prescription for not only being late, but also wrong as to the long-term impacts of purely political moves.

Investors need to wake up and look as to what is happening in the real economy and market prices. For example, the US stock market large cap leaders are up mid to high teens on a year-to-date percentage basis. These returns are in many cases twice the too high actuarial rates for many pension plans. If these long-term plans were properly equity oriented and if they went to cash today, which they won’t, they would have met their obligations for two years. Probably much more significantly, this summer’s equity rally reduces the odds in some minds of a fear of a major market decline.

Another sign of the markets moving ahead of the politicians in response to the manipulation by the US Federal Reserve and the ECB, is the significant sale of US dollars not only to buy stocks, but gold and the euro. The latter is a bit breathtaking. Following the very bad practice of US bailouts and corruption of the bankruptcy acts as a vote buying exercise, the ECB will supply enough capital through the purchase of bank bonds to be prepared to restore the major banks’ capital requirements after a soon to be appointed European banking authority eventually forces a substantial write-off of the debts incurred on the periphery.

What is missing in almost all countries that are running deficits is that the politicians provide goods and services because the people won’t. Individuals do not recognize the responsibility for their own deficits. These deficits are not the mismatch of their expenditures versus their incomes. The deficits are much deeper as in healthy lifestyles, competitive useful knowledge, work ethics, and accumulating retirement income for themselves. I am told by those on the left that I am asking too much. I suggest that once again we can learn something from the ancient Greeks. Look at the last Olympics, people all over the world cheered the success of champions and other participants in many competitions even if they had little real understanding of the sport.  Further, in our society someone becomes something of a celebratory for completing a piece of art, musical composition or a book despite what some might say is the poor quality of the work. It is the completion of a recognizable task that is celebrated. What we should celebrate and therefore encourage is striving. When more Americans and Europeans show signs of striving we will begin in a meaningful way to dismantle the deficit producing engines.

How do we develop portfolio decisions?

The first thing to do is to look around you. "The trucks are rolling" was the message I got driving back from Washington on a Sunday. There were many trucks on the Turnpike. Many of them were from logistics companies that have become a critical part of “just in time delivery.”

At last night’s dinner someone in the steamship business noted that business was increasing. A mixed view is the continuing office building and luxury apartment construction one sees driving through Washington. At a recent investment meeting someone noted that people were coming up and offering twice the price for a condo than the owner had paid.

One of the negatives expressed about equities recently is that American businesses are running at very high operating margins in part due to a significant increase in productivity of a smaller labor force. For many companies, global sales growth has been disappointing. If I believe my eyes and what I see out of the logistics sectors of our economy, we are in the early stage of a re-equipment surge. At some point, even to get out today’s volume of goods and services, we will need to replace worn out machines and perhaps people.

One interesting question is how unproductive the heady amount of global Internet and media spending on entertainment is, compared to what has been lackluster spending on the part of business? While I do own a few shares of Apple from a historic accident, I do not consider myself a qualified analyst on the stock. I do not own shares in Microsoft directly, but a number of funds owned by my clients and I hold shares in both Microsoft and Apple. With that as a background, I wonder at what point are we going to see Microsoft’s business clients start to show some of the enthusiasm that has posted orders for Apple's iPhone 5? If that were to happen, the world will become more serious about working on its problems rather than its entertainment.

In the meantime selling US dollars is probably wise.

What do you think? 

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