crunch time is here

The big port complex in Los Angeles is reporting that it expects a yoy decline of about a third in the amount of cargo it processes, starting in the next week or so. In the close to half-century (ouch!) I’ve been involved in the US stock market, the processing of economic information with significance for the financial markets has come in two phases–anticipation of, and then reaction to, developments. Reaction has always, in my experience, moved markets more than anticipation, with reaction taking on progressively larger role as computers have replaced human analysts.

Paul Krugman

I’m a big fan. Reading his Substack posts, I can understand why he parted ways with the NYTimes. Today, for example, he writes:

“Trump and his team have done something remarkable: They have started a trade war that is bad both for Americans and for countries that sell to us. But Trump is unlikely to change course. The economic punishment will continue until morale improves.”

I’d add my thought that the damage inside the US will be disproportionately felt by the ordinary citizens who voted him into office.

Disney

My family and I have recently returned from a few days at Disney World. My reactions: lots of fun, a new generation of us introduced to the Teacup Ride, hugely expensive. The Coke Zero I can find in the supermarket on sale for $.50, for example, was $5+.

My pre-earnings-release reaction has been that because the parks are so expensive–and that Comcast is opening a serious competitor pretty soon–DIS is closer to a short than a screaming buy. I’m no longer so sure. Given the plunge in the dollar that Trump has triggered, Disney World may will look cheap to foreigners. There is the issue that a foreigner risks being seized by ICE and imprisoned in El Salvador, with apparently no possible legal recourse. My guess, though, is that this will not be top of mind until the first incident happens.

M&A

As usual, taking off my hat as a human being and putting on my investor hat, I’ve been thinking for some time that we’re in a value stock market, not a growth one. Put a different way, for the moment solid asset value is more important than explosive growth potential. If the dollar’s decline continues, and I have no reason to think it won’t, at some point, this alone will likely trigger an M&A boom. as foreign money seeks to acquire cheap US assets.

are Venezuelans invading the US?

Trump says yes. That’s his rationale for arresting and deporting alleged Venezuelan gang members that he asserts are agents of that country’s government. US spy experts, however, say this isn’t true, as a recently declassified document attests. This makes the Trump/ICE axis seem much more Putin/KGB-esque–and the failure of Congress or the courts to do anything more chilling. Enough to cancel that trip to Disney? Probably not. Enough to have second thoughts about that M&A? Definitely.

Warren Buffett was already a Wall Street legend when I entered the stock market in 1978.

Two things made him already famous back then:

–he formed an early investment partnership that was highly successful for a time. But he returned the partners’ money at the point where he thought he had, for the moment at least, run out of good ideas. No one does that, or almost no one. Instead, the general partner continues to collect management fees while spinning his/her wheels.

–a value-style investor trained under Benjamin Graham, Buffett was among the first professional investors in the US to understand the value of a company’s intangible assets. Intangibles are things like brand names and distribution networks. Both are key to a company’s success, for brand recognition and defense against competitors. Nevertheless, all the advertising and a lot of the distribution costs only appear on the financial statements as expenses. In other words, even though they are extremely important in establishing barriers to competition in any retail business, they don’t appear on the balance sheet at all (except sometimes in acquisitions).

Take Coca Cola, a key Buffett holding or many years, as an example. The market cap of KO is about $300 billion. Annual advertising expense is about $4 billion. If we take advertising as the only element in brand recognition (ignoring completely the ubiquity of distribution and the quality of the product), my the company has probably spent about $100 billion in today’s dollars on advertising so far this century. If you and I decided to launch a Coke competitor, that’s probably much less than the minimum we’d have to spend to be a viable alternative. If we subtract this intangible asset from the market cap, the stock isn’t trading at 24x this year’s earnings but 16x. Just making up a number, if we subtract the value of the distribution network, the stock is maybe at 12x.

The succeeding years haven’t been especially kind to Buffett’s value-style approach. Charlie Munger was, to my mind, a much more important influence on Berkshire Hathaway’s investing in recent years.

Nevertheless, the folksy Sage of Omaha persona of Buffett’s and his reputation for savvy investing built over half a century have given him the almost magic ability to expand the PEs of the stocks in his portfolio simply by his having bought them. His recent link with the Japanese trading companies is an important case in point.

It will be very interesting to see whether and, if so, how long the Buffett aura will last after he departs at yearend.

I’ve been sitting in front of my computer, trying to think of a way to describe how I see the economic/stock market situation in the US today. Then Crazy Eddie popped into my mind.

Crazy Eddie

In the dim past–1978, to be precise–I was living in NYC and looking for a job. I worked as a cab driver for a while and then as a bank teller, so I needed an answering machine in the unlikely case that someone desperate for a Vietnam veteran with a PhD (two big negatives at that time) might call when I wasn’t at home.

I went to an electronics store called Crazy Eddie. Its advertising tag line was “His prices are insane!!” I knew it was a kind of unsavory place, and that I had to be careful. But it did have by a considerable amount the lowest price for the model I wanted. A salesman sent a runner to the back room to get the machine while he wrote up the sale. The runner returned, but with a different machine. The salesman yelled at him and then turned to me. He said the machine in his hand was a newer, better, more expensive model. He would sell it to me at the same price as the one I wanted, though–or I could wait another 15 minutes, or however long it took, for the inept runner to come back with the correct machine. In either case, no returns. I picked “newer, better.”

When I got home, I found that what I’d bought was an older, clunkier, cheaper model. It did ultimately field the call that led to a stock market job, though.

Crazy Eddie went public in 1984. The firm went into bankruptcy in 1989 when it was unable to sustain a massive accounting fraud it had been engaged in from the very beginning. The eponymous Eddie (Antar) went to prison.

Why this thought? Who knows, but…

–I’ve been reading arguments, made mostly by chartists, that the S&P is back on the right track because it has rallied recently from down 15% since the inauguration to down 5% now. But this ignores the fact that the Russell 2000, which is a better indicator of what’s going on in the domestic economy is still down by 12%–yes, it was off a few weeks ago by about 24%, but still…

Compare that with the EAFE index of established non-US markets, which is up by 10.2% over the same time period, despite being comprised by and large of companies that are pale imitations of their US-based rivals. A loss of 15% in relative value for the US market over just more than three months is a staggering amount. I haven’t looked, but although this might also have happened during Trump’s pandemic denial, my guess is that we’d have to go back to the 1980s to see a relative loss like this.

It seems to me the largest part of this relative decline has little to do with the operating performance of companies in the US equity market, many of whom have extensive foreign operations and are beneficiaries of their increased value in $US terms.. I read this instead as a bet by the world against the USA as a place where people will want to live and where businesses can flourish.

The US dollar has fallen by about 8% since Trump took office, and arguably accounts for the largest part of the subsequent performance difference between the US and EAFE. The only greater loss of value that I can think of in a major currency is what happened to the British pound (-18% vs. USD) after voters committed economic hari-kiri in 2016 by opting to leave the EU. Kind of like the ghost of Christmas future for us.

–what’s also struck me is that in both Canada and Australia, Trump-ish candidates to become their next heads of state, who both had commanding leads in their election battles a short while ago, were ultimately defeated–by significant margins. Hard not to read both votes as strong desires not to have their own version of Trumpish tariff and deportation policies, and to remain instead lands of the gfree and homes of the brave.

PS. I learned today from the internet that our Attorney General proclaimed in a recent cabinet meeting that had it not been for Trump’s war on fentanyl smuggling from Mexico, 83% of the domestic population would now be dead. I wonder where the Democrats were hiding the bodies last year.

an interview and a tattoo

I saw a replay a day or two ago of an interview with President Trump that touched on his refusal to obey a Supreme Court order to return Kilmar Abrego Garcia to the US from a contract prison in El Salvador.

The interview is the most recent in a series of interactions with the press that appear to show the president to be suffering from the same kind of age-related mental deterioration evident in former president Biden during the last days of his term in office.

Asked if he would obey the Supreme Court directive, Mr. Trump said that he could do so with a single telephone call if he wished–but would not. Why? He produced a large photograph of the back of the prisoner’s hand, showing “MS13” in black letters across it …proof, Mr. Trump said, of KAG’s gang membership.

The interviewer replied that the letters had been photoshopped onto the picture.

the strange parts

–Mr. Trump appeared not to know what Photoshop is, despite its being around for over a quarter century as the centerpiece of Adobe’s Creative Cloud, which has 37 million paid users. Is he actually so out of touch?

–in 15+ years of being around Photoshop as a photographer, I can’t recall seeing a photo where less effort was put into making a fake look realistic than this one. In particular:

—-the color of the MS13 characters is substantially darker than the real tattoos;

—-the pinkie is at about a 30 degree angle away from the camera–the skull tattoo on the pinkie reflects this, but the 3 is squarely aligned with the camera view, and, oddly, rotated slightly to the right;

—-all four characters are slightly misaligned with the tattoos below them;

—-the the edges of the MS13 characters are razor straight, with none of the ink spreading evident in the real tattoos;

—-the M and the 3 appear to be directly on top of the knuckles. The internet tells me this isn’t the norm.

So, either Mr. Trump has been duped by staff member(s) with weak Photoshop skills, or he’s presenting the photo as evidence despite knowing it’s a fake. Neither one is a good look. Neither is a great reason for investing in the US.

I’ve just updated my Keeping Score page for April 2025.