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Too Many Short-Term Worries To Pick Long-Term Winners - Weekly Blog # 946

Mike Lipper’s Monday Morning Musings

Too Many Short-Term Worries

To Pick Long-Term Winners

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

Current Concerns

Both the management of our international and domestic actions increasingly seem to be personality driven, and for the moment have at best a one-year focus. The level of smart intelligence applied is from a smaller and smaller number of people. The level of wisdom applied to Iran, Israel, and the greater middle east does not appear to be working. Observers believe it will take a considerable time to totally clear the Straits, while pictures of shopping areas in Iran show them to be well stocked.

On the domestic side, there does not appear to be recognition that large portions of the workforce are not working, at least regularly for taxable pay. Part of the problem is people in government believing in test scores and mandated promotions. Homes are stressed and less and less people have the education desired by companies and governments to find qualified people.

The new Chair of the Federal Reserve appears to recognize these problems and finds government-generated statistics to be moderately helpful at best. He believes the private economy can supply better numbers. One of the time series I look at each Saturday morning is the list of weekly prices in The Wall Street Journal (WSJ), covering 72 commodities, currencies, ETFs, and securities prices. For many weeks the two largest weekly changes at the top and bottom of the list may have been deceptive. In the current week the two top performers were the KOPSI (South Korean stock prices) +11.43% and the Nikkei (Japanese stock prices) +7.92%. The two biggest decliners were NYMEX Crude -9.75% and NYMEX Crude (US listed) -8.14%. The third numbers in array were +3.64% and -6.57%. Thus, four out of seventy-two were extreme and perhaps only of use to specific traders.

Turning to the securities markets which have also been shifting in terms of importance. When our Grandparents followed the market, they looked at the Dow Jones Industrial Average (DJIA), which was carried in most newspapers and on most radio stations. As financial intuitions became larger, they were followed too, as well as the brokers servicing them. Additionally, larger individuals that somewhat competed with them followed the Standard & Poor’s 500 (S&P 500), which was on most wire (electric) services.

I am suggesting that the growth of relatively new Technology companies, particularly those involved with “AI” captured in the NASDAQ Composite, is more of a speculative market as many of these companies have only been publicly traded for a few years. One way to see the difference between those stocks tracked by the S&P 500 and the NASDAQ is to look at the percent of new lows vs the percent of new highs. For this week new lows on the NASDAQ were 65% of new highs vs. 47% on the SWX. Another way to look at this picture is to use the percentage of stocks on the new low list, which was 46% for the NASDAQ and 53% for the NYSE. This would indicate that older and larger companies on the “Big Board” are portraying more problems on the NASDAQ. I suspect that a relatively higher portion of “AI” related companies trade on the NASDAQ. If this is true, it should help their outlook.

This weekend’s development changes everything. You don’t have to accept my views, but you should understand them and I will be happy to communicate with you.

Many of us are impacted by what our family passes on to us, long before we realize how the world really works. Fred Trump, a real estate operator sitting in Queens, New York passed on to his two sons the fears generated by President Hoover’s economic recession. The recession created encampments of unemployed workers, which were then labeled after the President. The current President grew up hearing these deep concerns without a fully understanding the 1929 Wall Street crash. The crash bottomed before the next President, FDR and his “Harvard Brain Trust”, took over in 1933. They turned the Hoover recession, caused by lose-money and the Smoot Hawley tariff, into a depression. FDR was the third of four structuralist presidents, after Andrew Jackson and FDR’s distant cousin Teddy Roosevelt. It was his various actions that took a serious recession into a much deeper and longer depression and was one of the causes of the rise in military governance in Italy. Germany and Japan were the alliance that created WW II. But the current restructures’ President Trump, who by personality and political skills, not policies, is much closer to FDR than he recognizes, panicked this weekend. He very likely saw a depression coming and looked at his battle with Iran as a costly distraction. He is now anxious to end his war with Iran to prevent the 1930s type depression he fears.

Longer-Term View

At times I feel that I am the only one focused on investing for my grandchildren and now great grandchildren. With them in mind I look at past “bull markets”, which indicate that it is rare for leading investments may repeat in the next “bull market” and increasingly that is where I choose to devote my time.

Any suggestions are most desired, as few people seem to think that way.

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Mike Lipper's Blog: Is This the Last Hurrah? - Weekly Blog # 945

Mike Lipper's Blog: New Era? - Weekly Blog # 944

Mike Lipper's Blog: Warnings Increasing - Weekly Blog # 943

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Is This the Last Hurrah? - Weekly Blog # 945

Mike Lipper’s Monday Morning Musings

Is This the Last Hurrah?

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

Preface

Hurrah is both a shout of victory and a political world about aging politicians, warning that the following election won’t be a happy one. (BTW it is pronounced Oorah in the Marines and Hoorah by the Army.)

I don’t know whether the reception for the largest IPO of all time is a sign we will not see larger market enthusiasm in the future. I am talking about both the size of the SpaceX offering and the further gains generated after underwriting. What I do know that it was a record fundraise at a time when many non “AI” stocks are dealing with mediocre sales. Consumer sentiment is at its lowest on record going back to the early 1950s

More importantly, I am trying to find investments for the next “bull” market. My assumption is that we will experience a substantial rise after a major correction to the present market level.

The Process

The first thing I don’t do is look for clues to a different future by crunching GAAP numbers found in today’s annual reports or other regulatory accounting statements. To the extent present sales data may be useful, they need to be adjusted to match reality. For example, today it looks like semiconductor companies are doing very well in Taiwan and South Korea. Truth is, only some of their product sales are produced in their home country, with increasingly more in other countries. More importantly, I am guessing their ultimate sales are to US customers. Thus, investors are concerned that many of these so-labeled international companies are extremely sensitive to what is happening in the US.

Forward Looking Analysis (Guessing)

The example that I discuss should not be treated as a buy recommendation and should only be rendered knowing the economic condition, resources, and personality of the buyer. The case I will discuss shortly is a long-standing large position with a large unrealized potential tax liability, although the analytical thinking may also be appropriate for the reader.

The stock is Berkshire Hathaway. The news item is the $8.5 billion purchase of Taylor-Morrison Homes for cash, including the assumption of some debt. The initial size is about 1/3rd of Berkshire’s annual net free cash flow, excluding their large cash reserves.

The decision made by the new CEO of Berkshire was completed in matter of weeks and was applauded by Warren Buffet. The announced plan is to create a housing group combining Taylor-Morrison with already owned Clayton Homes, which manufactures homes at a lower price point. Taylor-Morrison builds communities of new middle-class houses as well as rental housing. There is a national need for more housing.

I believe this purchase is very similar to Berkshire buying See’s Candy, which was initially misunderstood by some as Berkshire going into the Candy business. They were instead going into the franchising business, which has been an excellent business for McDonalds. In this case they would be going into the home mortgage business in a major way, with a controlled sample. Furthermore, this is a sign that Greg Able the new CEO of Berkshire, has different talents and proclivities than Mr. Buffet without the guidance of the late Charlie Munger.

This is an example of how to investigate the future.

Let us know what you think about our views?

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Mike Lipper's Blog: Warnings Increasing - Weekly Blog # 943

Mike Lipper's Blog: Rhymes + Future Opportunities - Weekly Blog # 942

Mike Lipper's Blog: Many Trends Within the Same Market - Weekly Blog # 941

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New Era? - Weekly Blog # 944

Mike Lipper’s Monday Morning Musings

New Era?

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

Evidence

After an extended period of daily market movements below 1% per day, the most meaningful stock market index fell -2.64%, with the technology sector falling much more. The 30-company Philadelphia Semiconductor Index which produces the critical needs for “AIs” explosive growth fell -10.3%, while the NASDAQ Composite fell -4.18%. (This is not the first decline for a new technology driven bull market, which was led by railroads, canals, and undersea cables in 1873. These stocks traded on exchanges in America, London, and Vienna. In Vienna the market dropped 45% in one day.) Despite the happy talk from Washington and various pundits, we have seen continued notices of layoffs from large, seasoned companies, including by Macy and Saks. In New Jersey, April unemployment was 4.8% vs 4.3% nationally. (It was just announced that Exxon and Chevron have changed their state of incorporation from New Jersey to Texas.) What is more significant to me is the number of bank branches that are closing. Perhaps more significant is the observable factor that attractive, wealthy women, are not wearing expensive jewelry while shopping or at performances.

Midweek, the AAII sample survey showed the market outlook for the next six months being 36% bullish and 37% bearish. (I suspect that if the survey was done after Friday’s market, we would have seen a bigger total for the bears). Interestingly, some stocks that typically don’t attract tech buyers, like Coca Cola* (+3.46%), Moody’s* (0.49%), and even Apple*, fell less than the market (-1.25%).

*Owned in managed or personal accounts.

My View

Most analysts and pundits compare stock price performance to past cycles to determine investment policies, much like telling time with a stopped clock. Seldom in an investment career does it pay to look for meaningful structural change. One way to do this is to recognize that old firmly held beliefs, like a flat earth, keep us from falling into the abyss. Like Columbus, we should seek to find new riches by going against the popular view, putting faith in a compass over an orderly world view. Similar to Columbus I may be wrong, but I will hopefully reward my backers with fabulous wealth by addressing society’s real problem, far too many unproductive people. Not only are the young unproductive, but there are also healthy seniors not working for money or the good of society.

Today’s government employment data shows that there are sufficient job openings for all the unemployed, although the hirers say they can’t find enough people to meet their needs. Only 61% of our population are employed. I translate that to mean they can’t find people with the correct attitudes and education to meet their needs. This is an indictment of both our schools and homelife. To solve this problem, they should automate wherever possible, which can mean using “AI”.

For many years I boarded a 6 AM train with papers to read, reaching the office at about 7 AM prepared for my first meeting with colleagues or committee members of the New York Society of Securities Analysts, the trade association of my profession. I was not alone, I would meet other analysts outside their offices for a bite of breakfast, where executive committee members were also having breakfast with their direct reports or others that were on the way up. (This was not the normal day that the executive committee officially met, but they were still doing business.) After a full day working numbers and writing reports, I caught the 6 PM train home. I arrived at close to 7 PM and then spent time with my children going over how they spent their day. Thus, my workday was 12 hours, with some additional time spent on the weekend. I probably spent some 70 hours a week fighting my way up the ladder.

The law calls for a 40-hour week, which does not include lunch. Today, according to the Department of Labor, the average American works a little more than 34 hours a week and that time probably includes lunch. If you listen to the young people of today, they believe in a work/life balance of at least 50/50. No wonder our productivity grows at around 3%, which appears to be higher than in China.

“Evidently, when Trump visited Xi Jinping last month, the Chinese president made a pointed reference to the concept of overstretch. A concept that was put forward over two millennia ago by the ancient historian and general, Thucydides. Can China and the US overcome this trap? There is also the risk of war expenditures becoming greater than the rest of the economy. The current administration, unlike China, is extremely focused on short-term-announcements impacting the mid-terms. Strategically however, both the President and Xi Jinping are aware of the seminal work by Rear Admiral Alfred Thayer Mahon, titled The Influence of Sea Power Upon History.

See what you can do to increase productivity and put more of us to work for society. Your help is needed.

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

Mike Lipper's Blog: Warnings Increasing - Weekly Blog # 943

Mike Lipper's Blog: Rhymes + Future Opportunities - Weekly Blog # 942

Mike Lipper's Blog: Many Trends Within the Same Market - Weekly Blog # 941

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Warnings Increasing - Weekly Blog # 943

Mike Lipper’s Monday Morning Musings

Warnings Increasing

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

Preface

I cannot predict the future, and I believe none can. The best I can do is use a life-long habit of dealing with chances of what may happen. In other words, odds are one possibility is more likely than another.

We all hope that the various problems facing the financial world will be quickly solved to our personal benefit. However, as a trained analyst I am compelled to increasingly doubt the expressed views found in most US media and by other pundits which are not completely echoed beyond our borders. These items came out last week.

Worry List in Chronological Order

The number of farm bankruptcies rose 40%. (The same thing happened before the depression.)
The University of Michigan Consumer Confidence Survey dropped to 93.1 from 93.7.
Another Fund Management Company is looking to find a new home - Dimensional Fund Advisors. (I expect there will be others.)
Perella Weinberg, an investment bank, is laying off 10 partners and 10% of the firm. (More to come?)
Gary Shelling predicts a 30 % chance of a S&P 500 bear market in 2026 and a 60-70% chance in 2027.
Canada has economically contracted for 3 of the past 5 quarters, falling into a recession. (The US is their largest customer, and our companies own lots of Canadian companies.)
Prudential Insurance, Meta Holdings, and Johnson & Johnson, are compelled to announce layoffs.
On Friday, the last day of the month, more stocks were sold on a decline on both the NYSE and NASDAQ. However, this may be typical selling before the weekend.
In May only three S&P 500 sectors rose: InfoTech+5.6%, Consumer Discretionary +0.26%, and Healthcare +0.21%. Eight sectors fell.
The three forces that led to the market index rising were: Affluent Consumers, “AI” investments, and Asset Allocation. (Contrary points: Inflation was up more than wages. Other industries that were similar and didn’t work out: canals, railroads, radio, airlines, atomic energy, and computers. Bonds were a safe way to beat stocks and “private debt and equity”)

Warning: Be Careful, Let Others Have Some of your Winners.

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Mike Lipper's Blog: Rhymes + Future Opportunities - Weekly Blog # 942

Mike Lipper's Blog: Many Trends Within the Same Market - Weekly Blog # 941

Mike Lipper's Blog: What Can Go Wrong - Weekly Blog # 940

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Rhymes + Future Opportunities - Weekly Blog # 942

Mike Lipper’s Monday Morning Musings

Rhymes + Future Opportunities

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

Truths

From the beginning of human evolution, elders have instructed the young with real and imagined tales of history. For the most part, the speakers were survivors or were protected by survivors. The smarter of the young learned two things, histories tend to repeat, but not exactly. This is where the rhyming came in. Only the very smartest of the young learned that there were tales by losers. To continue being a living survivor the truth in many cases was disguised, as it was more threatening than going into combat. Many passed on their knowledge of events through playwrights, actors, singers, producers/directors and students of the past as made-up dramas.

It is too bad that most historical dramas are not taught with a deep understanding of the politics and economics of the day. Matter of fact, that is probably how a skilled professor should teach economics. There is a risk in doing so, as we prefer tales of winning rather than why things happen. Notice that today major TV programs and theatrical productions are produced by organizations dependent on others for capital and licenses.

With that as perspective, please look at William Shakespeare’s Merchant of Venice. By the time he produced the play he was a favorite of the British Crown. From an economic point of view the play was opposed to the creation of debt and the timing optionality of repaying debt in unfortunate times. Now, substitute the crown for the debtor in borrowing large sums of money for war making purposes.

Does that ring a bell with the current President, who is a personal user of debt and urges businesses to delay recouping wrongly structured tariffs? The bigger problem is that most nations are similarly staying in power by doing somewhat similar things. They are behaving as other members of society do, e.g. businesses, non-profits (particularly universities and hospitals), and retail individuals. In business courses we should teach the proper way to create, manage, and use debt. (I don’t think it is taught at Wharton, where the President attended, or perhaps he didn’t take the class.)

The Growing Problem

The following are statements from others related to the problem:

Barron’s - “Higher bond yields provide competition for stocks.”
The CBO predicts a federal budget deficit of 5.8% in 2026 and 6.1% for the entire next decade.
“JP Morgan looks to reduce exposure to $4 Billion in private equity-linked loans.”

Longer-Term Opportunities

After the debt problem has been delt with, I look forward to a favorable period for equity investing. The following are brief comments that show some hope for gains.

Earlier this year the only mutual funds enjoying substantial gains were precious metals funds and those invested in “AI”. Currently, performance leadership has broadened out to industrials, some financials, and some international stocks traded beyond our borders. Currently, the mutual fund averages in twenty-five sectors out of one hundred and five are doing better than the average S&P 500 index fund.

The Financial Times discussed the investment success of Chris Hohn, a very successful British hedge fund manager. In many ways his portfolio is like the portfolio Warren Buffett and Charlie Munger put together, in terms of its concentrated positions. However, Chris Hohn excluded some industries from his portfolio that Berkshire had used in the past, like banks, utilities, media, and insurance. Both he and Berkshire Hathaway (*) like monopolies and duopolies and spend a great deal of time studying the barriers to entry for the companies.

* Stock owned by personal and investment accounts

One of the largest industries critical to the health of the world is the healthcare industry, which is selling at its lowest price since 2000. This is a difficult industry for me to directly invest in. Picking the winner requires a good understanding of what is being developed in their own and competing laboratories as well as the rules likely to be issued by various government agencies. The way we participate is by using mutual funds that have appropriately qualified staff.

One stock we own for the next bull market is Korn Ferry (*), a leader in employment management. We see it an “ultimate income” play for “AI” layoffs. It has a medium yield.

* Stock owned by personal and investment accounts

We are looking for more stocks for the next “bull market”.

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

Mike Lipper's Blog: Many Trends Within the Same Market - Weekly Blog # 941

Mike Lipper's Blog: What Can Go Wrong - Weekly Blog # 940

Mike Lipper's Blog: This Weekend’s Learning Sources - Weekly Blog # 939

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A. Michael Lipper, CFA

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