vinod1
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Posts posted by vinod1
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Hire 6 million people and pay them $50k each.
That's $300 billion.
Nice dent in the unemployment rate. What drives bank consumer losses BTW?
I get your point, but the $300 billion is going to spread out over many different economic segments of the population. Some of it is going as salary increases or bonus pools of people who are already in the high income bracket. I would bet a pretty significant chunk of it goes to this segment. Some of it should go into denting unemployment as you point out.
I would also think that some of this would be mitigated by higher chargeoffs and lower revenues from the now poorer non-financial companies. So I am not sure how much net benefit banks would get from lower profit margins overall.
Vinod
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My portfolio is concentrated in financials which trade well below the mean, however I remain very interested in the market valuation level as a whole.
Partly because it impacts financials.
What is going to cause this mean reversion in profit margins? Will it be an investment and hiring boom from upstart competitors that will blow bank earnings and growth through the roof?
Is S&P500 mean profit margin reversion something for me to fear as a bank investor or is it instead an opportunity?
LOL. You are always so optimistic.
Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power?
Vinod
Thinking a bit more about this, I think the argument could be much simpler. Banks have consumers and businesses as their major customers. The fact that profits for one (businesses) would reduce the profits of the other (customers), so I would think they should roughly even out and it should not make much of a difference to banks profits. There might be an optimal balance of profits between the two sets of customers of banks but overall I do not see much impact to banks profitability based on how the pie (profits) get divided between the two.
Vinod
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My portfolio is concentrated in financials which trade well below the mean, however I remain very interested in the market valuation level as a whole.
Partly because it impacts financials.
What is going to cause this mean reversion in profit margins? Will it be an investment and hiring boom from upstart competitors that will blow bank earnings and growth through the roof?
Is S&P500 mean profit margin reversion something for me to fear as a bank investor or is it instead an opportunity?
LOL. You are always so optimistic.
Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power?
Vinod
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Look at another way. Long term profit margins are 6%, and with current sales on the SP around 1000, normalized EPS would be $60. I'm being conservative using $70, IMO.
I look at it another way too, adjusting ten years worth of sales for inflation and taking the ten year median. This alleviates the problem of having the majority of years at record high profit margins distort the EPS figure. I can get to a FV of 1000 using this method.
But to your question on having two recessions in the data set, that is exactly the point, to have earnings spanning economic cycles. I use the median as oppose to average in order to account for the record low EPS in 2008/2009. Hussman for example uses the average which has $19 EPS in the calculation. IMO, his numbers are overly bearish.
I have been making pretty much the same argument since 2005 to myself and to anyone who would listen to my rants. This is probably one of the root causes for me personally in avoiding much of financial crisis. As with many of these kinds of questions, I always ask myself "What would cause me to change my mind that the mean for profit margins has migrated to a higher level?" I noted that if profit margins in the years around 2010 still remain elevated I need to revise my thinking on this since it is more likely that I was wrong if profit margins could remain elevated for so long. I had written out my thoughts in that period in a sort of investment diary.
I am now leaning towards the fact that normalized profit margins might justifiably be higher than they have in the past. If we use S&P 500 margins. First, the composition of the industries that are in the index is going to change and that would impact the profit margins as well. A larger percentage of retailers in the index would reduce profit margins say when compared to say having a larger percentage of Tech. Second, if many companies outsource lower margin operations to other countries then profit margins must trend higher on those that remain.
I do not think the estimate of $100 and $105 for 2011 and 2012 for S&P 500 earnings are normal. However, I also think the estimate of $60 might be too pessimistic. Normalized margins might more likely to be in the 7-8% range.
I agree with Grantham that profit margins are the most mean reverting of all in a capitalistic economy. But he (or others) does not say anything about what profit margins are normal or that mean profit margins should not change with structural changes in economy. I think profit margins might be more likely to be mean reverting around the 7-8% range going forward.
Vinod
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I am trying to buy a Treadmill and wanted to go with Sears because they are the only ones that I know of that will also install (maybe services are really the main attraction?).
Costco both delivered and installed our exercise bike and elliptical machine. Ordered online.
We had a problem with the elliptical machine going "clunk, clunk, clunk" after a while -- so Costco arranged to have a person come to our house to repair it. Didn't cost us a penny.
Thanks! Just ordered one from Costco.
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I would think they should have at least got their online platform to work reasonably well. I am trying to buy a Treadmill and wanted to go with Sears because they are the only ones that I know of that will also install (maybe services are really the main attraction?). As much as I tried I could not put an order in, it is giving me weird errors and contacting their customer service via Chat I got the following:
I am sorry, the item you are looking for is currently out of stock, however, it will restocked soon.
I suggest you to visit our website, frequently to get the update the information regarding the product.
I had similar problem just trying to schedule an install they allow you to start off by selecting a product (treadmill) to install but in the next step where you have to select the product again you do not have any exercise equipment category to select.
Vinod
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I just read it. It gets better and the last few chapters (Part 4 - Lessons Learned) are worth a re-read. He sounds eerily like Buffett in those chapters and it is clear Lou is influenced by Buffett.
Vinod
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I would look first at the qualitative criteria
1. Are they following the value approach i.e. do they really believe in it and does their portfolio reflect this? Look at the portfolio they are holding in 1999, 2005-2007, and mid 2009. Read the shareholder letter to find out their reasoning for the portfolio. For me a badge of honor is negative returns in 1999 and low returns in 2006 and 2007. We know from hindsight and it should have been clear to any good value investor in 1999, that the most attractive and safe stocks in 1999 had a near zero to a small loss.
2. Look at turnover and expense ratio. If they are really following value investing they should have turnover in the range of roughly around 15-25% implying a holding period of 4-7 years. But this is a very rough guide and it should only be used over a number of years. Also they should have low expense ratio indicating that they are not greedy.
Vinod
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Investing without a firmly held opinion of IV. This is primarily because of not doing enough leg word and research to develop that conviction. When you invest without conviction, damn, Mr Market starts popping up in your head when the stock price declines and stays there for a while.
This is an idea from Howard Marks but resonates with me strongly.
Vinod
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Vinod, do risk management teams improve the culture of a company despite optimism regarding collateral and capacity, or does optimism induce management to reap profits in spite of risk management teams? At almost every major institution related to the crisis, some mid-level people spotted risks. Paulson even recruited a Bear Stearns executive to oversee the construction of his swaps!
Unless the automated risk management controls buffer optimism and exuberance, they simply work until they really don't. The more faith people put into the an automated procedure--a few people have already noted sovereign risk-asset weightings--the crazier the downside.
Basel III, in its current form, should make people bullish on the NRSRO system.
Do not disagree at all. I do not have much faith in automated systems for risk management. My point is more around the intensity and focus that is being put on risk management. Previously focus used to be on growth, now it is all about risk. I am saying optimism is in retreat at least anecdotally.
Taleb had a very good article called "The black swan of Cairo" http://www.fooledbyrandomness.com/ForeignAffairs.pdf.
Vinod
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The banking system today has not been reformed. That doesn't mean the banking system isn't healing or the consumer isn't healing. Nothing of the sort. But what it means is that these major bankers are waiting for the music to start again. People hated the music from 1930-1980. But today's banker and consumer can't wait to hit the dance floor again.
I am with Klarman on this one. Unlike GD, the GR has not been a good teacher.
I do not think we would be able to say if the banking system has been reformed until after another 10-20 years. I can give some anecdotal evidence that it is more likely that enough changes have been made to make the financial system pretty robust
1. Where I work, we are spending just under $200 million for Basel 2 compliance. This amount is not to shore up capital but to strengthen the control and risk management systems and to ensure that the data we report is accurate. Company is absolutely fanatical about making sure that there are 2-3 levels of checks and balances along the whole chain. This is pervasive across multiple dimensions in the type of data we look at, the risk models we use, etc. Always the concern is what can go wrong? We built a castle, we have a moat, we filled the moat with dangerous reptiles yet it seems it is not sufficient. We are populating the perimeter with fire breathing dragons.
We are in close contact with regulators and they are being fanatical about putting all the right controls.
2. I recently moved to a new house and when I tried to order cable, they did a credit check, and not satisfied they wanted the lease agreement. When I sent them the lease, they found a minor error in the lease agreement and asked me to correct the lease agreement before they process the order! I have very good credit history but the Cable company wanted to make sure that the lease agreement is corrected.
We have come a long way from no doc loans of $500K to a legal team scrutiny of a cable order with a a monthly bill that is around $150!
3. I took a loan on a car just to get my wife's credit history built up. It is a joint loan from a credit union in which I had a bank account for 17 years. The has my direct deposit of my salary for the last 14 years and cash on hand in the checking account has averaged twice the car loan for many years. Yet it took me heck of lot of documentation just to get the loan approved. I had to talk 4-5 times with the loan officer before the loan got approved.
This leads me to believe that people have probable gone to the other extreme. Dexia and MF Global seem to point otherwise but I think those are much different and do not reflect what is going on in the broader financial world.
Vinod
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We did not have any banking crisis from the end of great depression until the early 1980s. We had a pretty boring banking system for 4 decades after the trauma of GD.
Vinod
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Purely based on psychology I think there is much less likelihood of a crisis at the big banks in US
1. Penualtimate preparedness as Peter Lynch calls it. Preparing for the last crisis that we did not see coming. Never again seems to be the motto of many investors to be blindsided by such financial shocks.
2. Think about bank regulators and bank examiners at the individual banks. At least at the bank I work, I know we have swung to the other extreme in terms of awareness and attitude to risk. It is perfectly understandable of course. Think of the incentives for a bank examiner. Anything that blows up after he has examined that bank would reflect very badly on him and his career just after taking so much critique for not doing a good job in a crisis a couple of years back. Same goes for many senior managements.
3. Banks essentially seem to embody the sum of all fears for investors. They have a very valid reason of course to be fearful. I would be much more worried about things that no one is worried about. If so many people are worried about something and especially people high up who are in power are also worried about it, I sleep much more peacefully about such risks.
Vinod
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Someone wanted to know where to find data on Indian companies. Consider this an early holiday present.
See the Attached PDF. Here is a Scribd link as well: http://www.scribd.com/doc/75608280/Indian-Net-Nets-13-Dec-2011
Thank you!
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I found a library branch that carries Value Line, so I'm going to go check it out and see if it would be worth it for me to subscribe.
They have a 3 month trial subscription for $75. You get 13 segments, one each week that covers 1700 stocks. You also get online access where you can download all the pdf's for the 1700 stocks (using a download browser utility). I get this once every couple of years. For me it is definitely worth it.
The first thing I do when researching a stock is to look up the Valueline pdf so it comes in pretty handy. Also going through the 1700 stocks one at a time gives you a very good sense of the majority of the large cap and mid cap stocks in US. Also it allowed me to short list about 200 stocks that pass a first screen of quality criteria that I plan to keep an eye on and develop a competency in.
If you just want to look at how a valueline report looks like they have free reports for the Dow 30 stocks on their website.
Vinod
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I agree with Mr. Bass in that the Japanese Bond short trade appears attractive, and perhaps has a good negative correlation to the equity markets.
Bass makes an incredibly compelling case for that (among other things) in this video I just got done watching. Shorting Japanese insurers that hold a lot of government bonds is something I am exploring.
http://www.youtube.com/watch?feature=player_embedded&v=WWgtzwqWh60
i read that the japanese own 95% of their own debt. seems like it's in stable hands and not leveraged. also japan can print money and monetize the debt if need be. if bass gets this one right he should run for King of the World. He would get elected.
To summarize Bass: Problem is not only existing debt but going forward. Japanese savings rate has been coming down from around 15% range to barely above 0%. So in future their debt had to be funded from external sources. Their debt to govt revenues is around 20. At a wtd average debt cost of 1% interest expense is taking up 25% of govt revenues. If debt costs rise by 1-2% you can do the math. Picture aint pretty.
Vinod
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Thank you!
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In some cases I have replaced equity exposure if I have a better return investment but for the most part I like to buy cheap LEAPs on cheap stocks (ala FFH a few years ago). I have found one that I am invested in now EXC LEAP and in the process of examining another. With these position I purchase the longest LEAP available at a slightly out of the money strike and treat like an equity position. If the stock approaches a resaonable upside, I like to get 5-8x returns. Since these positions are more risky than most I limit purchases to 5 to 10% of portfolio at most. I will invest maybe 2 to 3% of portfolio at max in a LEAP position. So my down side on a portfolio basis is 2% but the upside is 10%+ per position.
Packer
Thank you!
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If Japan has to issue more debt to foreigners then there will be much more pressure to cut expediture/increase taxes. It would become very similar to what Europe needs to do except they don't have multiple countries that need to agree on a plan.
I do not think Japan resembles Europe in any way.
1. Japan has a trade surplus - except for a few months here and there.
2. Japan has an independent currency and a central bank willing to print if needed.
One of the above has to change for Japan to be dependent foreign debt.
Vinod
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Mostly equity stock below $200 million. On the larger cos (multi b$ firms), I typically hold LEAPs versus the underlying. FFH is my largest equity position.
Packer
Packer,
How do you view your investment when holding a LEAP vs a stock? Say you have a 5% of portfolio allocated to a LEAP which might be say equal to a 20% nominal portfolio exposure to that investment, do you think of it as having invested 20% of your portfolio or do you just view it as a 5% allocation?
Although it depends on the attractiveness of the opportunity, do you limit your LEAP allocation to a certain percentage of your total portfolio? I would think a 50% allocation of portfolio to LEAP would introduce a very high degree time sensitivity to the portfolio.
I recently moved towards making most of my investments via LEAP balanced with a very high cash percentage and just wanted to get your thoughts as you seem to have a similar approach.
Thanks
Vinod
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China can hold all the gold in the world but it is not going to give confidence to people to trust it as the reserve currency. If they become democratic and they develop the whole set of checks and balances across the various branches of government, then sure after a few decades of stability they have a chance.
I have a tough time imagining any dictator or drug lord hoarding their wealth in Yuan in the next several decades.
Vinod
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Hard to see why the solution is not Germany & France ultimately pulling out of Euroland, & effectively nationalizing their domestic banks. The big domestic industrials get protected, we get Breton Woods 2, & global banking broken into segregated pillars – capitalized according to the risk.
Assuming all Euroland does an Iceland, & declares an average 25% haircut ..... things could get very ugly.
SD
That might be the best of the bad options but do not see that as a painless solution for Germany. Exports constitute 1/3 of German GDP and if it exits the Euro its currency is going to soar relative to many of the countries in Europe. That could be a pretty significant hit to its economy and this would be occurring at the same time as a major economic upheaval across the globe as a result of such a disruptive event.
Vinod
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The disturbing thing to me is that no European leader is stepping up and stating that the Socialism is at the core of the destructive forces now engulfing the PIIGS. Until there is open repudiation of this concept as public policy, the system in place cannot be fixed.
What does socialism got to do with this? If every country in Europe had their own currency, the problem would have been very manageable, first by sharply curtailing much of the debt buildup and then by making both monetary and fiscal measures available to policy makers.
Vinod
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All good points, thanks. Kraven, no argument here and it certainly sounds like Vinod agrees. I am Starting to dig at Jpm. Have enough exposure to Wfc and Bac.
:) I just started digging into JPM as well. Had enough exposure to C and BAC.
Vinod
Market Valuation
in General Discussion
Posted
My portfolio upside is concentrated in BAC as well. Cognitive dissonance though for me :)
Vinod