UK

https://www.bloomberg.com/news/articles/2023-07-28/-dangerous-consensus-has-investors-betting-it-all-on-buoyant-markets?srnd=premium-europe#xj4y7vzkg What once was a posture of skepticism has morphed into something approaching investor euphoria. Cash and hedges are out, replaced by demand for everything from small caps to meme stocks. Fueling the surge is data showing the US economy is thriving amid mounting evidence the Federal Reserve is beating inflation. All the optimism has sent the S&P 500 to the brink of its sixth advance in seven months and pushed prices in the Nasdaq 100 to almost 35 times profit. It’s manna for bulls — even as it leaves them with precious little wiggle room should anything in the economy or monetary policy not unfold as hoped. “It’s dangerous and consensus, but it’s late July, so who feels like fighting it?” said Peter Tchir, head of macro strategy at Academy Securities. “We are now at stage where people feel obligated to fully commit capital. Hawkish Fed not an excuse right now, and claiming recession is hard to justify as well.” Good news on the economy is sucking more and more investors into risky assets. A steady expansion in speculative spirits has pushed equity positioning to the highest level since January 2022. Investors have a clear overweight exposure to stocks after long refusing to budge off their underweight positioning, according to Deutsche Bank AG. At the same time, a wide array of hedging metrics is showing low demand for downside protection. Put premiums for both Invesco QQQ Trust Series 1 (QQQ) and the SPDR S&P 500 ETF Trust (SPY) are hovering around the lowest levels in at least a decade, according to RBC Capital Markets. Additionally, investors are buying more calls to chase the rally while spending less to protect their gains. “The market is just not ready to let go of the positive narrative. Hedging is outrageously cheap,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “There’s more driving of demand of calls from folks who are underperforming than those who have done well and need to hedge.”

This is very interesting discussion! Recently there is a lot of publicity about all this climate, weather, increasing catastrophe costs and 'uninsurable' future, such as: https://www.wsj.com/articles/climate-risk-a-major-challenge-for-insurance-industry-treasury-says-6725f954 https://www.wsj.com/articles/business-insurance-roiled-by-climate-inflation-205049df https://www.wsj.com/articles/insurers-are-in-the-hot-seat-on-climate-change-74e27330 https://www.bloomberg.com/graphics/2023-us-climate-disaster-costs-wildfires-storms/?srnd=premium-europe#xj4y7vzkg https://www.bloomberg.com/news/articles/2023-07-28/treasury-s-yellen-says-extreme-weather-exposes-gaps-in-insurance-protection?srnd=premium-europe https://www.bloomberg.com/news/articles/2023-07-28/extreme-weather-risks-making-parts-of-the-worlds-un-insurable?srnd=premium-europe Climate change “has the potential of changing the insurance business profoundly and making part of the world un-insurable,” Gonzalo Gortazar, CaixaBank SA’s chief executive officer, said in an interview with Bloomberg TV Friday. “It’s not happening yet, but if we keep moving in that direction this is something we will have to face in due course.” Yet, is that represents more of a threat (unexpected losses, regulatory risks, etc) or an opportunity (increasing market, better pricing, etc) for insurance/reinsurance companies? Perhaps everything will come down even more to execution quality of any particular company? Could all this negative publicity at least help improve pricing somewhat:)?

https://en.interfax.com.ua/news/investments/924955.html The international insurance group Fairfax Financial Holdings (Canada) has increased its stake in the Ukrainian agricultural holding Ovostar (Ovostar Union) to 17.499% from 10.39%, the company announced on the Warsaw Stock Exchange on Tuesday.

https://www.bloomberg.com/opinion/articles/2023-07-21/warren-buffett-s-florida-bet-bodes-well-for-troubled-insurance-market#xj4y7vzkg

https://www.barrons.com/articles/travelers-stock-climate-change-insurance-investing-6a8535e1 Unusually high catastrophe losses left The Travelers , a New York-based property and casualty insurer, in the red last quarter, but the stock rose nevertheless. That underscores a misperception about insurance stocks. Investors aren’t betting on the weather and the damage it brings, which can fluctuate drastically from year to year even as climate change makes storms more intense. What matters is how insurers charge for and manage that risk over longer periods. Although insurance companies’ balance sheets have been hammered by increasingly frequent and severe natural catastrophes in recent years, their stocks haven’t plunged. Insurance shares in the S&P 500 index are down about 1% since the beginning of the year, but up by 13% from a year ago. Investors aren’t losing faith in the group because insurers have been able to boost premium rates, taking in revenue that they will invest to cover future losses. Many have also been pulling out of risky markets, including California and Florida, where they couldn’t charge high enough rates to make profits, given the storms and wildfires that plague those states. The Travelers (TRV) is an example of how it is playing out. On Thursday, the company reported a loss of $14 million in its second quarter, or seven cents per share, a sharp fall from the $551 million in income, or $2.27 per share, it recorded in the same quarter last year. The red ink was mainly due to higher catastrophe losses from “numerous severe wind and hail storms in multiple states,” according to the company. In the second quarter, the firm paid $1.5 billion in catastrophe damages, twice as much as the $746 million in the year-earlier period. “We had six events surpassed the $100 million mark in Q2, the most ever for a single quarter since we began disclosing the table in 2013,” said CFO Daniel Frey on a call to discuss the results with investors. Nevertheless, the stock gained 1.8% in Thursday trading as investors were more focused on the firm’s net written premiums, which grew 14% from last year to $10.3 billion. Net written premiums—the amount collected minus payments for reinsurance—in the business insurance segment increased by 18%, partially driven by higher rates for renewed policies. And despite the higher prices, retention was strong at 88%, according to the firm. In the personal insurance line, net written premiums were 13% higher than in the year-earlier quarter.

This is very interesting, thanks for sharing! This is how I feel about both these companies too. I first bought some FFH maybe in the end of 2012 (or similar time), when there was a dip and they reached 3 year or so low, after they were thrown from the MSCI Canada or some other index, but the next 10 years, due to their bearish positioning and mistakes, it was love and hate or on and of holding for me (that is more of a trading sardine) and I never get enough conviction to make it a big position. But from the last year (and I was already maybe 1-2 years to late, and many thanks to Viking, Parsad and others for sharing their analysis and thinking on FFH) I do not see it as a trading sardine anymore. And they are still cheap on absolute and 'value today', while at the same time with improving results and also in a position to re-rate at least some 30-50 per cent relatively. I also followed JOE (together with Berkowitz) from a long time ago, but until covid and later reading all discussion here (again, many thanks to Gregmal and others) last year, I also did not have enough conviction to make it a large position. What is interesting, while FFH is already cheap on current results, JOE is maybe more in a 'value tomorrow' bucket (if you insist for having a view on future results to value it), but at the same time, if you look at it through possible NAV (as per latest discussion) it seems to me also like 'value today':). So here you are, you have two understandable, owner/large investor operated companies, with perhaps little if any disruption risks, with quickly growing/improving results, still cheap and not discovered or loved by market too much (with hopefully still wrong perceptions) to buy and do not touch, if nothing unexpected occurs (or they double or triple too quickly-lets hope for this scenario:)), for at least the next 3 or 5 years. I am not sure I have enough conviction at this time to suggest owning only them two, but even if you do not have much better ideas, adding BRKB and at least one other postiion will give you a well diversified portfolio, as per Munger:))).

https://www.bloomberg.com/news/articles/2023-07-18/buffett-unit-s-potential-wildfire-liability-stokes-industry-fear

Not much on the current market temperature, but otherwise quite good memo from Marks on this whole market calling/timing issue: https://www.oaktreecapital.com/insights/memo/taking-the-temperature While on the subject of buying too soon, I want to spend a minute on an interesting question: Which is worse, buying at the top or selling at the bottom? For me the answer is easy: the latter. If you buy at what later turns out to have been a market top, you’ll suffer a downward fluctuation. But that isn’t cause for concern if the long-term thesis remains intact. And, anyway, the next top is usually higher than the last top, meaning you’re likely to be ahead eventually. But if you sell at a market bottom, you render that downward fluctuation permanent, and, even more importantly, you get off the escalator of a rising economy and rising markets that has made so many long-term investors rich. This is why I describe selling at the bottom as the cardinal sin in investing.

Remembered while thinking about this Magnificent 7 problem:)

https://www.investing.com/news/economy/investors-brace-for-earnings-from-magnificent-seven-us-growth-giants-3126294 BofA Global Research projects they will increase earnings by an average of 19% over the next 12 months, more than double the an 8% estimated rise for the rest of the S&P 500. They will need strong results to justify premium valuations. Those companies trade at an overall trailing price-to-earnings ratio of about 40 times, versus 15 times for the S&P 500 excluding those companies, according to BofA. Their results may be crucial to the market as a whole. Fueled by their recent gains, megacap stocks have climbed to dominate benchmark indexes, causing headaches for some managers of active funds. In the S&P 500, the seven stocks comprise 27.9% of the index's weight. “It’s also how do these big companies, which are carrying the market ... guide for the rest of the year and into 2024,” he said. Overall, the seven companies account for 14.3% of overall S&P 500 estimated earnings for the second quarter, and 9.3% of estimated revenue, according to Tajinder Dhillon, senior research analyst at Refinitiv. But many investors say the corporate giants are nevertheless here to stay as critical holdings. Yung-Yu Ma, chief investment officer at BMO Wealth Management said that while “there is a lot priced in” to megacaps’ valuations, that did not mean they are overvalued. "If you think about the megacaps broadly ... they have gone from a core holding of a portfolio to an almost absolute necessary major component of the portfolio once you factor in trends such as AI," he said.

Something to think about. Thanks for sharing!

https://www.bloomberg.com/news/articles/2023-07-13/top-tech-stocks-power-an-18-month-surge-from-bear-to-bull-market Call it a bubble or an artificial-intelligence-driven hype cycle. But here’s another way of looking at the rally that sent the tech-heavy Nasdaq-100 to its best-ever first-half performance: a narrative round trip. Only about a half-dozen companies are responsible for virtually all of the advance, leading to a lot of investor angst over how precarious the gains feel. But it’s possible to look at the same set of facts and conclude that nothing has changed in the market over the past 18 months. The clutch of technology giants that dominate the market got crushed when it seemed as if the US Federal Reserve would drive the economy into a recession, and in 2023 that view has been reconsidered. ... “The problem with market timing is it’s inconsistent with the underlying philosophy of investing in stocks, which is that stocks really are for the long run,” says Ed Yardeni, founder of Yardeni Research Inc. “And if you get out, you have to be smart enough to get back in.”

https://www.wsj.com/articles/pepsi-pep-q2-earnings-report-2023-2f9d2b0 Pepsi said its companywide organic sales, which strip out currency and merger impacts, rose 13% from a year earlier in the second quarter—stronger than analyst expectations for a 10% rise, according to Visible Alpha. This was largely due to big, double-digit price increases, as underlying sales volumes fell slightly from a year earlier. But in the Frito-Lay North America division, maker of snacks like Cheetos and Doritos, volumes actually rose 1%, bringing organic sales growth in the division to 14%.

Some interesting info on market sentiment: https://www.bloomberg.com/news/articles/2023-07-07/force-firing-up-the-stock-market-cools-off-with-shorts-conceding?srnd=premium-europe#xj4y7vzkg “At the index level we went from deeply bearish sentiment in the fall to the other extreme right now especially in tech. I don’t think it’s fair to say that’s true for every sector,”

Personally I hate owning meaningful part of portfolio in cash or long term bonds (I want much more than 4-5 per cent, even from government bonds, which happened to me only once) for a longer term and I would not put more than 20-30 per cent portfolio in cash, even if markets seem somewhat expensive/exuberant and greedy (last time I felt this way in 2021), if it is possible to find something at least fairly valued, meaning with an expected return of >8-10 per cent. I like BRK as a theoretical benchmark and real alternative and I think it met very well this criteria in 2021 and still meets today (and perhaps every year since 2007, even including some periods of being more noticeably undervalued). To go to >50 cash, I really have not such real experience, but maybe it would be possible to imagine (also depending on long term rates etc) if market would trade at something like >30 normalized PE, with BRK>1.6-1.8 PBV and it would be impossible to find anything else sensible, without seriously compromising quality. But it seems that even during such periods like 2000 it was possible to find something with reasonable valuations and I hope it will be the case in the future:). Also for me the similar thinking applies to the other side, meaning if I feel the market is cheap (maybe already <15 normalized PE or even better if less), off substantially and with a lot of fear in it, then, depending on the opportunities, I would consider adding 20-30 per cent leverage. So most of the time I am about 100 per cent invested, but while being 70-80 per cent invested (defensive for me), I still have capacity to add about 60-40 per cent to my long exposure, if something exiting comes along, as last time I felt was the case with the market (and especially big tech etc) last year. I think if today I was given 100 per cent cash portfolio I would put at least 50-60 per cent of it into BRK and FFH (and this one is not even at 8-10 but more likely at >15 per cent expected return) on Monday and then in near future add to them / some other things until being 80-90 invested. Maybe even only with SNP500 available, I think I would still put 50 per cent of cash it into it and then think what and when to do with the rest.

I am not sure, but it seems that these remaining flows is about 9 per cent of total pre war EU gas import from Russia? Still could be painful for some countries (including Hungary), but maybe manageable / already not the issue for most EU?

Maybe this is also very timely for today: https://www.bloomberg.com/opinion/articles/2023-07-06/central-banks-should-stop-hammering-the-economy-into-recession?srnd=premium-europe Time again to move to something like the last year regime of worrying of higher for longer rates / braking of something / possibilities of large mistakes by central banks?

https://www.wsj.com/articles/home-builder-stocks-are-booming-as-homeowners-stay-put-df748479 “It’s a perfect example of the market where just when you think there’s nothing that can go right for a group, that’s when things start to go right,” Hickey said.

https://www.wsj.com/articles/ai-boom-stems-techs-downturn-a669b4a3?mod=hp_lead_pos1 SoftBank Group Chief Executive Masayoshi Son said last month that he plans to end a lull in investing and focus on AI after the ChatGPT chatbot rekindled his excitement about the future. “The time is approaching for us to go on the counteroffensive,” Son said at the annual meeting of the Japanese technology-investment company. “I want SoftBank to lead the AI revolution.”

I think maybe 10-year yield is more appropriate for risk free rate measure and currently it is at ~4 per cent. So bonds trade at like 25x multiple with no growth, but more importantly for the longer term, with no inflation protection. So assuming business such as Apple is as safe as heaven (lets trust WB here:)), global, with a strong pricing power and still growing, it is easy to rationalize choosing such business over bonds at the same or even somewhat higher multiple as it trades currently (25 vs 30). What would be your choice if you had to make a decision and lock it in for the next 10 or more years (and maybe this is the thinking of BRK)? However you have to draw a line somewhere, because at very low or zero yields this kind of math will lead you to the moon:). And in reality I am not sure at all that all of these big tech companies are completely risk free from some disruption risk (including AI) in the next 10 years, or even geopolitical (Apple and China?) or other risks (regulatory etc). So maybe for me anything of such size trading above 25x or 30x makes me very uncomfortable. Especially after seeing were those same, very special, companies (and I would definitely would not put all 8 in that category), were trading just some 6-8 month ago:). GOOGL and META both still trades at estimated 20x for the next year, almost in line/not much above the market, maybe still nothing to worry about, especially if you are sure AI will not disrupt search in any negative way and META will not fall into some another, real or imaginary, crisis:). And the sentiment around them is completely different from the last year, but maybe it will last much longer and gets even more positive (as we also seen before). So again I could rationalize to continue owning some of these big tech. But on the other hand the interesting exercise to contemplate: if and how much of these big tech companies I would put in the portfolio today if by some accident I was about to start with 100 per cent cash?