Sometimes (actually fairly often) it’s good to revisit the investment classics that stand the test of time. From Philip Fisher’s Common Stocks and Uncommon Profits, great questions to ask about a company before considering a stock investment:
Point 1: Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
Point 2: Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
Point 3: How effective are the company’s research and development efforts in relation to its size?
Point 4: Does the company have an above-average sales organization?
Point 5: Does the company have a worthwhile profit margin?
Point 6: What is the company doing to maintain or improve profit margins?
Point 7: Does the company have outstanding labor and personnel relations?
Point 8: Does the company have outstanding executive relations?
Point 9: Does the company have depth to its management?
Point 10: How good are the company’s cost analysis and accounting controls?
Point 11: Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in its relation to its competition?
Point 12: Does the company have a short-range or long-range outlook in regard to profits?
Point 13: In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares than outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?
Point 14: Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
Point 15: Does the company have a management of unquestionable integrity?
Today’s first ever FOMC Chair press conference is certainly the start of something new—but having nothing to do with economic or monetary policy. That I could see watching from Fisher Investments HQ, virtually nothing interesting or heretofore unknown was said. It was all very…political. Bernanke was well spoken, he was empathetic, he was balanced, he was sensible. He was all the things you look for in a politician’s speech.
So what we have here is not so much a new era of improved communication between the Fed and the public, but more like a politicization of the Fed—Big Ben is now an inch closer to being the head of the US economy in the public’s eyes—in some ways almost more than the president. Think of what an evolution that is: just 30 years ago the Fed was barely thought of at all for macro economics, now Bernanke is speaking to everything from inflation to manufacturing to the Japanese earthquake. Said another way, people believe he is in charge, and—gulp—has some mighty control over what the US economy does and is. In reality he mostly sets monetary policy and governs the banks—a vital part, but just a part, of the economy. Ben now seems less interested in saying what is true or what he really thinks than he is in saying things that he believes will be good for the market, good for the economy, will instill confidence in the system, confidence in him, etc. Oh, and also he will talk and behave in ways that preserve his job and ego (recall that this is an appointed post by the president).
The Fed Chairmanship is now—as of today—more of a public figure-headed institution than ever before. Time will tell what that means—the Fed is one of the most evolutionary public financial entities in all market history, and they’ve never been static in their policy or function.
- So far a recovery in employment hasn’t had anything to do with the bull market or the economic recovery. See this week’s (or this year’s) returns relative to the new higher unemployment number.
- Few will see it this way, but history could very well show that the US —more or less—did things right once the crisis hit. At the outset, huge liquidity provisions to keep the system afloat, and once the recovery took hold a few years later it looks like we’ll get extended tax cuts and probably even some spending cuts. QE2 notwithstanding (granted, that’s a BIG notwithstanding), that’s actually a pretty good way to navigate a financial crisis on in to a recovery.
- One of my favorite things is to read Fed commentary literature—it’s some of the best speculative writing since Ray Bradbury. Everyone thinks they “know” what Ben is “really” trying to say in his speeches. Ignore that stuff and act according to what is done, not said.
- A worthwhile read: Who Pays for Big Government?
- Russia hosting the World Cup will be less a grand display of the country and its prospects and more like a last gasp on the global stage.
- A thought-provoking and worthwhile opinion piece from Gerald O’Driscoll Jr. in today’s WSJ on whether we even need a central bank, and how the world might look without one.
- EU business confidence recently hit an all-time high. The EU economy will grow nicely this year and projected next year too. It’s a bizarre dichotomy right now between European sovereign troubles and their recovering/thriving private economies.
- The ECB extending unlimited lifelines to banks one quarter at a time doesn’t really help much at this point—knowing you’ve got a backstop for another 3 months doesn’t address the real issues. Although, it’s probably good that they didn’t sunset the program. That the ECB is buying Portuguese and Irish bonds right now is fine enough, but the scale of the purchases as of right now is way smaller than previous programs—it’s not a big initiative at this moment. Maybe it’ll grow…
- …you can think about the debt crisis in poker terms: Ben Bernanke’s got a terrible bluff—usually telegraphing his moves well in advance. Trichet’s got a great poker face, sometimes even misdirecting the public before making a move. He says he doesn’t expect another big stimulus initiative by the ECB—I wouldn’t hold my breath on that, particularly with EU finance ministers meeting in a few days.
- One of the main reasons for Europe ’s current fiscal problems is political. Have a look at Prime Minister Zapatero in Spain —he’s getting more unpopular by the day. Meanwhile, he’s got to figure out a way to make his budget work and support the smaller Spanish banks with dwindling political capital. Tough to get things done in that environment.
- An interesting thing about Obama and his administration is that they’re nothing if not persistent. Initiatives like the Healthcare laws and parts of FinReg looked DOA and yet eventually got done. And now the South Korean trade pact—which looked all but dead a week ago after the tepid G20 summit—now looks like it could actually get done again. That’s a good thing…the US has woefully under-participated in new free trade pacts this year where the rest of the globe’s done tons.
- Surprisingly profound quote of the Day: “It’s always here and now my friend, it ain’t once upon a time!” – David Lee Roth
- Here’s one of the most important articles of the year: Economists’ Grail: Post-Crash Model. Simply, any economist worth their salt knows that the nature of complexity and accelerating change means math as it exists today in no way is able to predict the direction of markets or economies. The world is too big and deep and complex and has been for a very long time. So it becomes a profession of probabilities. These Sisyphus-ian attempts at math blended with psychology are noble, but a losing endeavor for those who must make practical predictions…like investors.
- The euro sovereign debt thing ain’t over. Just don’t expect it to spark a new bear market. One of the oddities about the European situation right now is the disconnect from government finances and their actual economies. Ireland is set to grow +4% in 2011, and much of Europe is firmly in recovery. Germany ’s economy and stock market are up, as is European economic sentiment. Most of the rest of the world looks poised to post modest stock market gains for the year. That’s important because just a few months ago experts were declaring that asset markets were all unprecedentedly highly correlated. Yet, at least on a country basis for equities, there’s going to be some significant dispersion this year. Italy is down almost as much as Spain and Portugal , but Germany , Sweden , and others are doing just fine.
- Germany does a lot of its exporting to other European countries that use the euro. So, expect them to keep talking tough publically about other euro countries in fiscal trouble, but ultimately lending their support. Maybe the only way it breaks down is if Germany itself becomes fiscally endangered, in which case you can bet they probably won’t be willing to go down with the ship. But we’re nowhere near that right now.
- Obama’s proposed two year freeze on federal pay seems fine, but speaks to the overall lack of incentive to produce that comes with working for the government—pay isn’t based on any sort of output that I can see. This is also a clear signal to my view of Obama’s upcoming move to the middle to get reelected in 2012. Watch for a compromise on tax cut extensions to come next.
- The revelation that Russia has moved missiles near NATO territory isn’t going to rankle markets now, but it’s worth noting. With the SMART treaty in jeopardy, this is a sterling example of how frisky Russia could get given their desperate population aging and economic problems—which will only get worse over time. Desperate countries do desperate things and look for last gasps at power on the international stage. Eastern Europe is prime territory for that drama over the next decade.
- The brewing row in Florida over a phosphate mine and environmentalism is a global non-issue. If the US doesn’t do it, countries like Morocco , Tunisia , and China will provide all phosphate the world needs and more—and reap the benefits. Phosphate is used in everything from batteries to fertilizer, and the world will have a big need for it in the decades to come.
- Note that the Wikileaks scandal is a non-issue to markets, and really not that big a deal generally. Why? Most of the stuff in those leaks are all things most well-informed citizens of the world more or less expected to be going on anyway. Rumors have surfaced that next on the Wikileaks hit list are confidential docs from a big commercial bank. Same principle probably applies there too—will be damaging to whoever gets hit, but the global markets will likely mostly shrug it off, if it happens at all.
Lately there’s been much hubbub about how highly assets have been correlated (i.e. different types of assets all moving more or less in lock-step). Which is a (mostly) true observation lately. But, as an investor, be very wary of acting on such observations. Ignoring “correlation without causation” is one of the first and best lessons I’ve learned. Lots of stuff can be correlated, but if you don’t understand the reasons for it—and therefore aren’t able to make a sound judgment on whether it will continue—just ignore it. Because, as any technical trader or quant hedge fund investor will tell you, correlations work…until they don’t. And there’s no rhyme or reason for understanding when and how all that shakes out. For instance: After Nine Months, Crude Oil Parts Ways With the Stock Market.
The other side is, even if you believe two things—in this case oil and stocks—should be tightly positively correlated, you still have to figure out where one is going to know where the other one is going.
The Bundesbank (in Germany ) raised its estimate for German GDP to 3% for 2010 from 1.9%. Recall that about a week ago, German GDP blew past estimates in Q2, growing 2.2% q/q, which sparked this reassessment.
Many seem to believe this is a tame estimate, and anecdotal forecasts have ranged in the ~3.5% area. I should know better, but I’m still often left stunned and breathless at how fickle so-called economic models are. They quite literally take the recent past and extrapolate it into the near future. Which makes these things darn near worthless to investors, except in one important way: understanding market expectations. With economic models swaying in the wind as they do, they end up approximating what the world is anticipating. And that’s good because trying to understand relative expectations versus reality is what matters for stock market forecasting. So, in a bizarre way, these so-called empirical, math-based economic models function more like sentiment indicators.
Also, recall Germany approved an €80bn austerity package in June to balance their 5.5% budget gap (which Goldman Sachs now estimates will only be 3.4% in 2010). With growth moving so briskly and better than the world believed, one has to wonder how ‘necessary’ all that austerity will feel to politicians, who (particularly the likes of Angela Merkel) must be feeling beat up right now after a summer of PIIGS worries. Right now, the German government is standing pat on austerity, but look for that to change if things continue to improve more than expected.
To wit, the country that put the “S” in “PIIGS” is doing just that. Spain has decided to reinstate €500mn worth of Infrastructure Spending. The funds are purported to be spent in 2011 on a number of projects, the biggest being the development of the A8 motorway linking northern Spain with France . We aren’t even out of the summer of 2010 yet and the worst European debt offenders are already scaling back austerity on the back of stronger economic growth.
True, this is minor in size, but speaks directly to the idea that spending is less easy to cut than simply growing one’s economy in order to rectify budget problems. As ever, the easy answer is to grow the tax base. And by the way, none of these developments are consistent with the theme of a global double-dip recession— Europe ought to be the most prime candidate for it.
This is the kind of headline shrewd investors often interpret (rightly) as bullish: Firms Spend More—Carefully. Just below the headline, it reads: Equipment Purchases Make Up for Recession Cutbacks, Not to Raise Production.
How’s that bullish? Because the simple fact is that equipment purchases are rising, regardless of the “wariness” surrounding it. Or, said differently, economic (and stock) recoveries don’t transpire in waves of high sentiment—the “all clear” never gets sounded until long after. This is as true for CEOs as it is for your average investor. Economies still feel sick even as they heal.
You can think of this still a third way: A recovery, by definition, is first a replacement of cutbacks, then of resumed growth. We’re in the part of the cycle that still features “replacing cutbacks”, which likely means, barring something big and bad not already widely acknowledged, we’re still in the front portion of a longer bull market run and a stronger (again, global) economic recovery than most are willing to realize.
Don’t let a big negative day like today spook you—that’s what the stock market does best. The puzzle pieces for sustained, global economic growth remain in place, and renewed worries over deflation and/or new recession are based more on this wary sentiment than reality. Even a potentially less robust recovery, as the Fed intoned yesterday, is still a great environment to own stocks that remain very cheap in my opinion.
|*The content contained in this article represents only the opinions and viewpoints of theFisher Investments editorial staff.|
I don’t care if it’s early cycle, mid-cycle, or late cycle in an economic expansion (assuming you believe in the idea of predictable economic cycles at all, personally I’m dubious), economic growth is never a straight shot up.
Maybe you’re an optimist and say U.S. Retailers’ Sales Rise at Fastest Pace in 4 Years is super bullish, and a signal we won’t have a double-dip recession. Or, maybe you see that the ISM Non-Manufacturing (aka “Services”) composite fell more than expected in June, and decide yes, we are going to have that double-dipper, as is vogue these days.
I don’t think either one is telling. So what if retail sales were the strongest in 4 years? And so what if services were more sluggish than hoped? (Note: they didn’t contract, just didn’t grow as fast as expectations.) Both grew, and both are single economic data points that when looked at on a year-over-year or sequential basis can be highly erratic. Heck, check outquarterly GDP growth—during expansions it’s all over the place and one quarter doesn’t tell you much about what the relative strength will be the next.
Particuarly after an initial bounce off the bottom of a recession, a slowing and erratic pace of expansion is normal. Media and analyst reaction will latch on to these reports as emblematic of whatever serves their purpose. But the point is, they grew.
|*The content contained in this article represents only the opinions and viewpoints of theFisher Investments editorial staff.|