Mike Lipper’s Monday Morning Musings
Secular Investment Religions
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Timing of Views
Apple announced its
first calendar report this week, continuing a pattern of declining comparative
quarters, albeit with a smaller percentage decline and slower sales of its latest
iPhone model. Later in the week Berkshire Hathaway reported its first quarter results
showing it sold 13% of Apple, its largest holding. During the Berkshire presentation
I became increasingly concerned about the long-term outlook for US large-cap
equities.
My worries were
summarized in a column by Mohamed El-Erian for the Financial Times. He stated
“tighter regulation, industrial policy, chronic fiscal looseness and internationally
globalization has been giving way to fragmentation” as concerns.
Attending Berkshire’s
annual shareholder meeting this weekend, I read a slide showing the major
sources of the firm’s net operating income after taxes. One of the reasons to
go to the meeting is that they report the results of the over 60 wholly owned
and majority-owned companies in summary. In aggregate, their growth in earnings
has slowed down or fallen. Most of these companies produce products and
services used globally. Despite record domestic stock prices, it appears we are
probably going to see an economic decline of measurable depth and magnitude.
The questions that remain are timing and whether the decline is cyclical or structural.
These questions forced me to examine the nature of these two remarkable
companies presented this weekend.
Share Owners Create
the Nature of Ownership
While management of
the company largely dictates the nature of most companies, owners of the stock determine
the nature of ownership of the stock. As both stocks are within ten percent of
their all-time highs, there are very few losers in the stock. Both are multi
product companies that provide services to both individuals and wholesale users.
The companies have long outgrown their original set of products and services and
their reputations allow premium positions within our society. While they have
some competitors, they have no overall copycats. Their exact futures are not
clear, although many users and owners have a great deal of faith in them, even though
they don’t really know what their future will be. Without being sacrilegious,
these two stocks have reached the point of being a religion in the secular
world. Regardless of the existence of doubters and some heretics, it would take
a major violation of the trust that has been established to destroy their faith
in these two companies. (This has happened in the past, a couple of generations
ago when the “Generals” were the secular religion, as in General Motors and
General Electric, and many lesser Generals.)
Management Mistakes
Admissions Help
Apple finally gave up
on Project Titan (their car project). Elimination of their car project will allow
Apple to conserve some needed talent. A complete car is a very different
business and is not highly valued. Motorola lasted much longer, from its taxi
and police car two-way radio in its early days to the semiconductor and early
mobile phone years. On Saturday, Warren Buffet admitted he made the decision to
sell Berkshire’s losing position in Paramount. While they were a supplier to
Amazon, they didn’t buy the stock or another tech company until Apple.
Pulling the Thoughts
Together Early
Revenue leverage in
an inflationary period is unlikely to be maintained as a growth driver with
small unit growth. Around the world, unit growth is decelerating. Productivity
is also slowing because new hires are not as profitable as the seniors let go,
even though juniors are initially paid less. However, lower pay expenses do not
last long, as fringe benefits are more expensive, except for retirement.
Retirees have not built-up enough savings to cover expenses in a non-work
period. Productivity, where it exists,
is driven by non-domestic born labor. Birth levels are below replacement needs and
the education system is not producing ready, willing, and educated workers. AI
gains, if delivered, will probably help the middle class but not the lower classes.
The push for fewer working hours will create additional expenses and possibly
social problems.
We need Berkshire
Hathaway, Apple, and others to succeed for a healthy society around the world. Long-term
it must be global, let’s hope it happens.
Did you miss my blog last week? Click here to read.
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