Investors who like Berkshire Hathaway, and millions do, have had to have loved Charlie Munger. Mr. Munger passed away last week just about a month from his 100th birthday. He was born on New Year’s Day, 1924. My hope in writing a little about Charlie Munger in this issue of ERPE Excerpts is to help us remember a man that should never be forgotten. The image above is the cover of Berkshire Hathaway: Celebrating 50 Years of a Profitable Partnership.
As a fan of the wizards running Berkshire Hathaway for the near-40 years I have been an investment professional, I always admired Charlie for much more than just being, “Warren Buffett’s right-hand man”. Yes, Charlie and Warren were best friends (for 60 years) and they were incredibly successful teammates who co-managed one of the greatest wealth creating companies of all time. But way beyond Warren’s right-hand man, Charlie was an investor legend. He was abnormally insightful, gifted with extreme intelligence, a man committed to his values and morals and seemingly always maintained an inviting sense of humor. Charlie was an effective teacher by keeping his lessons straight forward and simple. “All intelligent investing is value investing — acquiring more than you are paying for,” he once said. “You must value the business in order to value the stock.” This past April at the Berkshire Hathaway Annual Shareholder Meeting, Charlie said, “I am personally skeptical of some of the hype that has gone into artificial intelligence. I think old-fashioned intelligence works pretty well.” In a speech to the USC Business School in 1994 Charlie said, “I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, ‘My God, they’re purple and green. Do fish really take these lures?’ And he said, ‘Mister, I don’t sell to fish.'” He was funny. He was wise. He kept things simple.
Charlie was considered wise by some wise people. One was author Peter Bevelin, who wrote, Seeking Wisdom: From Darwin to Munger. Peter Bevelin begins his book with Confucius’ great wisdom: “A man who has committed a mistake and doesn’t correct it, is committing another mistake.” Seeking Wisdom is the result of Bevelin’s learning about attaining wisdom. His quest for wisdom originated partly from making mistakes himself and observing those of others but also from the philosophy of Charlie Munger. Bevelin said Munger’s simplicity and clarity of thought was unequal to anything he had ever seen.
In 2005 the wit and wisdom of Charlie Munger was made available in his book, Poor Charlie’s Almanack. It contains all his talks, lectures and public commentary up to that time. The book came with a Foreward from Warren Buffett. He said, “From 1733 to 1758, Ben Franklin dispensed useful and timeless advice through Poor Richard’s Almanack. Among the virtues extolled were thrift, duty, hard work, and simplicity. Subsequently, two centuries went by during which Ben’s thoughts on these subjects were regarded as the last word. Then Charlie Munger stepped forth.”
Charlie has left us, but not without the great company he helped create. Charlie is survived by Berkshire Hathaway, which is still under the capable stewardship of his long-time partner, Warren. The chart below depicts how phenomenal the company Charlie and Warren managed has been as a stock compared to the SP 500 over the last 40 years. As it may be hard to see, here’s the facts: from December 30, 1983 through yesterday, Berkshire Hathaway ‘A’ stock gained 41,309.67% vs. 2,658.35% for the SP 500 index.
Thank you, Charlie Munger. May you rest in peace.
TAKING PERSPECTIVE…
Proper Perspective: In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.
What Happened On This Day, December 7, – Pearl Harbor attacked.
MARKET ANALYSIS
INDICATORS OF INTEREST:
Market’s Current Signal: Market in Confirmed Uptrend. Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points.
The Stock Market Trend: Market in Confirmed Uptrend. Wednesday November 1 the market closed up in higher volume came on the fourth day of a rally attempt. This follow-through day triggered a positive market trend signal to Market in Confirmed Uptrend. This was a bullish direction change from Market in Correction. The market’s technical’s and fundamental’s are both solid and support the market’s Confirmed Uptrend.
Here are key market levels as of Monday, December 4:
Recapping Last Week
U.S. equities finished November with a fifth straight week of gains. The S&P500 and Nasdaq Composite Indexes rose 0.8% and 0.4%, respectively, while the Russell 2000 soared 3% thanks to Friday’s rally. Ten of 11 S&P500 sectors were higher, led by real estate, industrials, and basic materials. Communications sat alone negative on the week. Crude oil prices gyrated back and forth in anticipation of the OPEC+ meeting, but settled just slightly lower after the meeting produced no new cuts. Saudi Arabia still plans to roll over their 1M barrels per day cut, while Russia plans to cut an additional 500K barrels and invited Brazil to join the group. U.S. Treasury yields tumbled again this week after global inflation data eased investors’ angst. Fed governors on Tuesday stated that “policy is currently well positioned to slow the economy and get inflation back to 2%”. Their comments were substantiated later in the week when the Core PCE Index had its lowest reading in two years at 3.5% year-over-year and just 0.2% from September. U.S. personal spending and income figures came in right at consensus. A softening jobs market aided inflation trends with weekly claims increasing to 218,000, and continuing claims rising to their highest level in two years. That didn’t stop consumers on Black Friday as online sales reached a record $9.7 billion, up 7.5% over last year. U.S. new and pending homes sales disappointed, dropping 5.6% and 1.5% over last month, respectively, impacted by the 3.9% annual home price increase and stubbornly high mortgage rates. In other economic news, the second estimate for U.S. GDP rose to 5.2% annualized, up from the 4.9% initial reading, while the trade deficit widened 3.4% with little effect.
Internationally, the flash estimate for Eurozone CPI fell to 2.4% year-over-year from 2.9%, with Japan at 3% versus 3.4%, and Australia down to 4.9% from 5.6%. Australia’s retail sales slipped 0.2% from last month, lacking the boost the U.S. gained from Black Friday. Consumer confidence rose in both the U.S. and Germany. In the Far East, China’s manufacturing activity has struggled, with the official and Caixin Manufacturing PMIs both falling into contraction at 49.4 and 49.5, respectively, largely due to soft demand from the Eurozone and U.S. Friday’s U.S. Manufacturing PMI report of 46.7 also reflected that slowdown.
Current View
The U.S. stock market closed one of the best November’s ever. All the major indexes were up about 9% or more. After the first few days of December, the market is hanging on to those gains and up slightly more. Investors could expect a pause. Yesterday was the first in a while that the market showed some fatigue. After an initial pop higher of almost 0.7%, the Nasdaq composite limped in to a nearly 0.6% decline by the close. While in a continued, confirmed stock market rally, the oil market has collapsed into bear market territory. A proxy for crude oil futures has lost 30% slump from its June 2022 peak. Oil stocks are slumping as the industry group is near the bottom of the 197 list industry groups. While this trend is not helping oil stock holders, it is absolutely taking pressure off inflation. So is a cooling jobs market. The impact of these economic developments is likely to keep the Fed from additional interest rate raises. Conversely, there is now over an 80% expected probability of a Fed interest rate cut by May of next year. This is all good for consumers, therefore the economy, and the stock market.
There has been a bullish market trend since the last days of October. Bullish market action has continued. What might be expected going into year end? Seasonal market factors side with the bulls. Historically, December has the 2nd best month of the year for stocks. Overall, the S&P 500’s “best six months” of the year kicks off in November. The index has historically finished December higher 75% of the time, and averaged a gain of 1.9% in December. In December’s preceding an election year, the gains tend to be even larger, with the Dow gaining 2.7% and the S&P gaining an average of 2.9% in those pre-election year Decembers. Looking at trends that date back to 1950, when the Naz index was up more than 20% through the end of November, it finished December higher 67% of the time, and has seen a 3.7% gain for the month on average, according to Dow Jones market data. Additionally, we might get a “Santa Claus Rally”. The S&P 500 has gained an average of 1.4% in the second half of December in so-called Santa Claus rallies going back to 1950.
Industry Group Strength: BULLISH. As of yesterday, 126 out the 197 groups I monitor are up year-to-date. 71 are down.
New Highs vs. New Lows: BULLISH. In yesterday’s session, there were 251 new 52-week highs and 57 new 52-week lows.
Dow Dividend Yield: BEARISH. The current yield for the Dow Jones Industrial Average is 2.14%. The 10-year Treasury now 4.11%.
Volatility Index: BEARISH. Volatility has been volatile. The “VIX” is now 13. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:
Fear / Greed Index: BEARISH. Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral. BE FEARFUL WHEN OTHERS ARE GREEDY. At 64, the Fear & Greed Index is up from 45 two weeks ago.
CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”
How CNNMoney’s Fear & Greed Index works
Bull / Bear Barometer: BULLISH. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 55.1% and the bears came in at 21.4%. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.
Put / Call Ratio: NEUTRAL. The ratio of put-to-call options is 0.63. The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.
ECONOMIC UPDATES
Global Economic Indicators & Analysis:
POSITIVE INDICATORS
Jobless Claims Inch Upwards, Labor Market Still Strong: The Department of Labor said today that initial jobless claims rose by 1,000, to 220,000, last week indicating layoffs remain low.
U.S. Productivity Surges in Third Quarter: The productivity of American workers rose by a revised 5.2% annual rate in the third quarter, the government said yesterday. It is the fastest pace since the third quarter of 2020. Excluding the pandemic era, it’s the fastest since the fourth quarter of 2009. Some economists argue that we are in a new sustained surge in productivity growth. This would be good news for many reasons but the main one is it would help contain wages and bring down inflation without a sharp rise in unemployment.
ISM Barometer Slightly Up: An ISM barometer of business conditions at service companies such as restaurants and hotels rebounded to 52.7% in November from a five-month low of 51.8% in the prior month. Numbers over 50% indicate expansion in the economy. The index has been above 50 for 11 straight months. Fifteen industries reported growth in November while three industries reported a decrease in activity. The ISM service employment index rose to 50.7 from 50.2 in the prior month. A separate report from S&P Global reported that the service sector PMI rose to 50.8 in November from 50.6 in the prior month.
Fed Chair Powell Holds Rates Steady: “It is too soon to say when the Federal Reserve will declare victory and start to cut interest rates,” Fed Chairman Jerome Powell said last Friday. Powell repeated that the Fed is prepared to raise interest rates further if it becomes appropriate to do so. Inflation data last Thursday added to investor confidence as inflation, as measured by the personal consumption expenditure price index, fell to 3% in October, down from 6.4% in the same month last year. Powell said the level of rates is “well into restrictive territory,” meaning monetary policy is putting downward pressure on economic activity and inflation.
Construction Spending Climbs: Construction spending rose in October for the 10th month in a row, largely because of work on commercial buildings and government-funded public projects. Spending on construction increased 0.6% in October to just over a $2 trillion annual rate, the Commerce Department reported Friday. Construction spending reveals how much the government and private companies spend on projects, from housing to highways. More spending tends to be a sign of good times and less spending typically occurs when the economy is weak. High interest rates have tempered demand for new homes and apartments, but they have had less effect on other forms of construction. Total construction outlays rose almost 11% in the 12 months ending in October, compared to the 1% uptick in residential investment during the same span. Government-funded construction has jumped 16% in the past year to buoy the industry.
Chicago PMI Jumps: The Chicago Business Barometer, also known as the Chicago PMI, jumped to 55.8 in November from 44 in the prior month. That’s the largest monthly gain since September 2020. This is the first reading above the 50 threshold for growth since August 2022. It is the highest level of the Chicago PMI since May 2022. The index is produced by the ISM-Chicago with MNI. It is the last of the regional manufacturing indices before the national ISM data for November is released.
PCE Relatively Flat: The cost of goods and services was flat in October, suggesting a further slowdown in inflation that could persuade the Federal Reserve to stop raising interest rates. Inflation as measured by the so-called PCE price index, or personal consumption expenditures price index, was held down in part by a decline in oil prices. Still, the gauge more broadly indicated an easing in price pressures. The increase in inflation over the past year decelerated to 3.0% from 3.4% in the prior month. That’s the lowest level since February 2021. Inflation is still running well above the Fed’s 2% goal, but senior Fed officials and an increasing number of Wall Street economists believe interest rates are high enough to hit the target in the next year or two.
Consumer Confidence Rebounds, Inflation Still Worrying: Consumer confidence rebounded in November from a 15-month low but worries about a recession persisted, a new survey showed. Consumer confidence tends to signal whether the economy is getting better or worse. Americans are grumpy about the economy despite the best job market in decades. The chief reason is a severe bout of inflation that has raised prices 18% in the past three years and eroded the standard of living. High interest rates have added to the misery and are expected to slow the economy. About two-thirds of consumers say a recession is “somewhat” or “very likely” in the next 12 months, the survey found. The economy has avoided a recession despite the sharpest increase in interest rates in a few decades, but higher borrowing costs are starting to pinch the economy. Businesses are hiring fewer people and investing less.
Case-Shiller Index Records Seventh Month of Gains: Home prices in the 20 biggest U.S. metros rose for the seventh month in a row and hit a record high, reflecting a persistent shortage of properties for sale. The S&P CoreLogic Case-Shiller 20-city house price index moved up an unadjusted 0.2% in September compared to the previous month. The index crested to the highest level since it was created in the late 1980s. After a brief pause, home prices have resumed their upward climb even with mortgage rates at the highest level in decades. While high interest rates have discouraged some buyers, there still is enough demand to keep home prices going up. Relatively few current owners — the beneficiaries of low locked-in rates — are listing their properties for sale and builders aren’t bringing enough new housing onto the market.
WEAK INDICATORS
Wholesale Inventories Fall Again: U.S. wholesale inventories slipped back in October, continuing a downward trend seen since the beginning of the year, after having stabilized a month earlier. Inventories at merchant wholesalers were 0.4% lower at the end of October than the same point a month earlier, according to adjusted Commerce Department figures released Thursday. Economists had expected inventories to slip by 0.2%, according to a poll carried out by The Wall Street Journal. Compared with the same month a year earlier, total inventories were 2.3% lower, the data show.
U.S. Trade Deficit Widens: The U.S. trade deficit rose 5% in October to a three-month high of $64.3 billion largely because of a decline in exports of American-made cars and COVID-related drugs. Higher deficits subtract from gross domestic product, the official scorecard for the U.S. economy. Imports are well off their 2022 peak, however, due to a shift in spending by U.S. consumers from goods to services such as leisure and recreation. The U.S. is still on track to report the smallest annual increase in its trade deficit in three years. Imports had surged to a record high in 2022 owing to strong consumer spending. Now a weakening economy brought about by higher U.S. interest rates has sapped demand and helped to reduce the trade deficit. That’s likely to continue to be the case in the months ahead as the Federal Reserve keeps interest rates high to make sure high inflation is under control.
US Factory Orders Drop: Orders for manufactured goods fell 3.6 % in October, pulled down by the transportation sector, the Commerce Department said Monday.
Orders for non-defense aircraft, mainly Boeing BA, -0.63% passenger planes, dropped sharply. Excluding transportation, orders were down 1.2% in October. Durable-goods orders fell 5.4% in October unrevised from the initial estimate released late last month. Durables are down in three of the past four months. Non-durable goods orders fell 1.9%. A key sector watched by economists, orders for nondefense capital goods, excluding aircraft, fell a revised 0.3% in October, down slightly from the initial estimate of a 0.1% decrease. Shipments of these goods, which feeds into the gross domestic product report, were flat in October after a 0.1% drop in the prior month.
Pending Home Sales Drop: Pending-home sales fell 1.5% to a record-low reading of 71.4 in October, according to the monthly index released last Thursday by the National Association of Realtors. This is the lowest level since the index was started in 2001. Over the past year, pending transactions were down 8.5%. Mortgage rates soared in October, causing activity to freeze. There has been a thaw in November amid growing expectations the Federal Reserve is done raising interest rates.
Consumer Spending Softens: Consumer spending rose a mild 0.2% in October in potentially another sign of a long-predicted slowdown in the U.S. economy. Americans spent more last month on health care, housing and utilities — all necessities. The U.S. savings rate, meanwhile, rose a tick to 3.8%. The savings rate has fallen since the end of the pandemic, however, and suggests Americans have less financial cushion than they did a few years ago. The burst of growth in the third quarter appears to have faded. Higher interest rates have sapped spending on big-ticket items such as cars and discouraged business investment. And inflation, which is still high, has made Americans more choosy in what they buy.
Home Sales Drop More Than Anticipated: U.S. new-home sales fell 5.6% to a seasonally adjusted annual rate of 679,000 in October, from a revised 719,000 in September, the government reported last Monday. The median sales price of new houses sold in October dropped to $409,300, down from $422,300 in the prior month and down 17.6% from the same month last year. That’s the lowest level since August 2021. New-home sales have been volatile but generally trending higher since last summer. Economists are starting to talk about a possible inflection point but are cautious about reading too much into the data, because October was when the average rate for a 30-year fixed mortgage rose to almost 8% before falling sharply in recent weeks. The drop in prices showed home builders are responding quickly to bring down costs for potential buyers. Owners of existing homes aren’t as interested in responding to the dropping prices.
Call me if you have any questions. I am always happy to help!
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Equity Research & Portfolio Evaluation (ERPE) utilizes its propietary approach in analyzing investments. Its proven success researching equities is based on a blend of fundamental and technical analysis. ERPE's time-tested Top 10 Tenets guide the investment process to achieve Portfolio Optimization: This is through minimizing risk without sacrificing return.
