US Equity markets about even to start the year http://www.bloomberg.com/markets/stocks/
Prices seem to be consolidating the rise that began at the bottom of the financial crisis in March 2009. As equity and other asset values go higher, it will take time for the profitability of US and global corporations to catch up. After the rise that occurred in 2013 it is normal to feel that “what goes up, must come down”. Assets prices have not gone down over the long run, although the short run has all types of twists and turns. If the total economic pie grows, living standards and asset values can rise with permanence. The down times tend not to be long lasting as we humans strive for better lives for our loved ones and our world. What is normal will be the periodic correction and periods of anxiety as the inevitable calamities, accidents and crises occur.
The recent Crimea territory dispute seems to follow a line that I have spoken about before regarding Greece, Cyprus and the Eurozone Crisis. These situations are quite real and painful for those unfortunate citizens who live there. Investors need to focus on how the hyperbole can escalate so quickly and then disappear just as fast. Even the Eurozone Crisis has seemingly calmed as the slow process of recovery has begun to show strength in Europe.
The March 31, 2014 cover of Barron’s http://online.barrons.com/article/SB50001424053111903536004579459323209921860.html?mod=BOL_hp_highlight_#articleTabs_article%3D1
proclaims “Bad News For Putin, Cheap natural gas, plentiful new oil finds, and efficient production methods will drive oil prices to $75 a barrel. A welcome boost for the U.S. economy. Not so Russia, which needs $100 oil to pay its bills.” We have discussed before what a game changer the U.S. energy boom is. This is another interesting and important aspect to the notion that Uncle Sam may not need to get involved in every part of the world that can be disruptive to energy markets. It may even be possible to envision a world where innovation that creates a bigger energy pie can solve many more problems than the US military could ever dream of.
Hey, stop sneering; I believe in a future with much less war and military conflict driven by growing economies in the US and globally. A future of economic opportunity that creates jobs for the young men in troubled parts of the world like Greece, Syria and Africa. It may be that the great threat of our world post 9/11 is nihilistic forces that are driven by economic desperation. These “terrorists” need jobs and a chance to grow their lives and families, that is how you fight the war on terror, with economic opportunity…uuugh, let’s get back to reality.
Prepare for a longer life. http://blogs.wsj.com/cfo/2014/03/25/pension-plans-brace-for-a-one-two-punch/
The WSJ reporter Vipal Monga caught my attention on 3/25/2014 with his piece “Pension Plans Brace For a One-Two Punch”. The article notes the continuing trend of the decline of the guaranteed pensions. Life is getting longer every day as evidenced by the fact that “The Society of Actuaries recently updated its mortality tables for the first time since 2000 to reflect the longer life spans of today’s retirees.” For those lucky enough to live to age 65, men can now expect four more years of life to age 86.6 and women get 3 and ½ more to age 88.8!!! Congratulations. Now we will all need even more money for the longer retirement years.
Living longer is a stark reminder about the need for long-term thinking. One of the greatest thinkers in all of investing history is of course, Warren Buffett. The investment world takes notice every year when the annual shareholder letter from Berkshire Hathaway is released.
http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/
http://www.berkshirehathaway.com/letters/letters.html
This year The Oracle of Omaha talked about the great long term results that he has witnessed with the purchase of farmland in Nebraska and New York retail property adjacent to New York University. According to the Berkshire annual letter; “There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings, whereas I have yet to see a quotation for either my farm or the New York real estate.” Daily real time valuation that we experience as equity investors is not necessarily a positive thing when markets get nervous and go negative. It is calming to look to Warren Buffet wisdom when the world seems scary, which is of course most of the time.
The shareholder letter goes on to add “If “investors” frenetically bought and sold farmland to one another, neither the yields nor the prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.
Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.” This quote is something that long term investors instinctively understand and practice. Trading is not investing and the costs associated with the former do not have to be borne by long term holders (investors) of quality assets.
Speaking of great things to own that you do not hear all that much about, the freight rail system in the US is booming http://www.forbes.com/sites/joannmuller/2014/01/22/americas-second-rail-boom/
Here again we see Warren Buffet make a great move as he purchased the Burlington Northern Santa Fe railroad on 11/9/2009 in the midst of the financial crisis. The convergence of the natural gas boom and technological innovation to create great efficiency and competitive advantage globally is on glorious display right here in our country. The US has some of the best freight rail infrastructure in the world. One can only wonder if the US could ever add passenger rail to our transportation infrastructure. There would be a great construction boom and relief to our crowded air travel.
BMW just announced it’s largest production facility to be built in South Carolina. http://abcnews.go.com/US/wireStory/bmw-plans-billion-expansion-south-carolina-23101537
This is a great example of the strength that exists in US workers and manufacturing potential. BMW’s plant is a real world case of the expansion of the economic pie. Manufacturing the US is growing broadly yet quietly across the country. These stories are mostly local and the do not make it on to the national (and overly sensationalized) media stage. More of the stories that emphasize growth need to be told. Sadly, this is not the case. The cable news monster has seized on the tragic loss of a passenger jet somewhere in the Indian Ocean as a story that offers endless angles, intrigue, and most importantly, viewer ratings. CNN has basically become the missing jet network for the past few weeks.
The missing Malaysian Air Jet is a tragic and frightening story. We all need to remind ourselves of the incredible quantity of flights that depart and arrive every day without issue. The success rate makes these events anomalies and something that is simply the result of living in a big world with incredible amounts of miles traveled daily. Media sensationalism latches on to the most dramatic stories and crowds out much of the quiet success that is the most important part of our everyday reality.
A sensational story for the market and investors has been sparked by the recent 60 Minutes story titled “Is The U. S. Stock Market Rigged?” Famed author Michael Lewis is proclaiming that we are all being “robbed”. The sales of his new book will certainly be enhanced by such urgent announcements. High Frequency Trading is a complex subject that has a huge impact on trading of equities in the US and around the world. The Pros and Cons of this relatively recent development in stock trading behavior and technology is part of a long term evolution in the problems that money managers, traders, famers and all types of producers that need to trade have faced since the beginning of time.
Let us think of an ultra-simple example of what the problem is. Let’s say there was a King and he wanted to feed all the people in his Kingdom. He may decide to buy all of the wheat that is available locally. If some enterprising citizens heard of this news before the king had made his purchase, the aspiring traders could go and buy at the prevailing price for wheat and then wait for the King to make an offer. The “traders” would be “front-running” the King and taking advantage of information that was not widely known. This form of informational advantage has always existed and impacted markets and trading. It seems a bit self-serving for Lewis to imply that through his investigative efforts he has uncovered something that has been going on since that dawn of economic society.
The trading that is occurring today is driven by technology that is powerful and scary. The notion that computers may be creating half of all trades on any given day is mind boggling. HFT money is looking for an informational, algorithmic or other quantitative advantage often in a very short hold period. The investor can be harmed by HFT traders. Fortunately trading is not investing. To obtain equity in SBUX or WAG we do need to make a trade to purchase our shares, but that trade should not have to happen that often or have costs that are prohibitive to the success of that investment over a reasonable period of time.
As a long term investor for over thirty years, I am quite concerned about fairness and ethics of equity trading and the stock exchanges. I am also skeptical of broad claims that imply that large scale economic injustice has been uncovered. As a student of the market, I have read about these problems for many years. We must always be vigilant towards the threats that reduce our outcome as investors. Keeping a long term focus as Buffett reminds us should create the highest probability of positive outcomes.