ni-co

http://video.cnbc.com/gallery/?video=3000466813 Nice Gundlach idea: Long closed-end high yield/short S&P 500. I put some of it on HIO/SPY.

Thanks, Liberty! For nuggets like these I love Malone interviews. I'm always wondering why he is willing to share his strategic views (sometimes too willing in my opinion). Ben Thompson wrote about ESPN and the cable bundle quite a while ago and came to similar conclusions: This was – and still is – a very lucid observation which, I think, not even Apple was fully aware of at the time. They certainly are now. And the existence of an opposing mainstream view is one of several reasons why I think cable companies are still great investment opportunities.

Like Liberty, I think the answer to the last question is clearly: yes. Think about what you're doing when using a measurement is the message here. EV/EBITDA is meant to give you an idea about a company's earnings power without regard to the underlying financial structure and taxes. Why is this useful? Because, with enough money, you could take control of the company and change its financial structure, i.e. reducing or adding to its debt load – and, in theory, there wouldn't be much of an effect on the underlying business. Since debt payments are tax deductible, the financial structure of a company has huge influence on a company's tax bill. Further, with complete control, you may also be able to move the company into a lower/higher tax jurisdiction, you may decide to spend money on growth - which also reduces your tax bill - and so on. This is the reason why EV/EBITDA is very important for PE investors who take control of companies. I think the reason some value investors despise it is because it doesn't take into account maintenance capex – in other words the money you need to reinvest to keep the flywheel going. You might be able to delay those investments for some time but in the long run you'd shrink/eventually kill the company. Therefore, from a value investor perspective EV/(EBITDA - maintenance capex) is the way to go for a large variety of companies. There are industries that require only very little maintenance capex, e.g. most software, internet or service companies. Because of this, EV/EBITDA gives you a reasonable guess at their earnings power and (with regard to their long term EBITDA) cheapness. Because EV/EBITDA is obviously "before interest", it doesn't work for companies earning their money in interest (like banks).

That's interesting but wasn't really my point here. My point was that Whitman underperforms value indexes.

Dont think its fair to compare hedge funds with mutual funds. The more I think about mutual funds, the more I hate them as an investment vehicle. Almost impossible to generate outsized returns. Agreed. But Avenue Capital and Oaktree do offer mutual funds. The fact that some of these guys manage mutual funds probably saved their ass in 2008/2009. I presume they wanted to get more focused and concentrated in their "best ideas" but the mutual fund restrictions saved them from themselves. +1 Though not true for all, e.g. for Berkowitz. 2008 showed which people really go the extra mile and do their own research and which ones just more or less concentrate on value statistics like an index fund would.

I don't really have a strong opinion on Pzena and have never seen him in an interview. He seems to prefer to keep a low profile. Just mentioned him because I remembered his value cycle theory and saw on his website while looking for it that he didn't all that bad against the value indexes. I can remember that Greenblatt – whom I think highly of – thinks highly of Pzena (they are friends, though). I tried to read several of Whitman's books and found them all horribly written – very affected and in an overly academic posture – and I haven't learned anything from them. In his interviews and writings Whitman strikes me as very arrogant, not mainly in the sense of high self-esteem (like e.g. Bill Ackman) but in the sense of talking down to people.

Yes, that would be interesting. Might fit the large "value cycles" Rich Pzenea – a value investor who, by the way, has out-performed most of the value indexes for the past 5 years – has talked about for years.

I tend to agree with you in general but not in this case here. I can see your point when people are comparing, say, Bruce Beekowitz against the S&P 500. Here however the performance vs the S&P 500 wasn't even that bad. But losing out against value index funds over 5 and 15 years really challenges the fundamentals of your business as a value adding fund manager. I really doubt that TA would outperform those funds by such a margin in an eventual downturn that it would be able to close that gap. Maybe they are just victim of their own success. in and case, Swedroe was absolutely right in calling Whitman out with regard to his arrogant bashing of Fama.

Unsurprising results but nonetheless interesting comparison between Third Avenue's performance against value index funds: http://www.advisorperspectives.com/articles/2015/10/19/third-avenue-management-defends-its-pursuit-of-alpha

I've heard the arguments of Druckenmiller and Singer and I don't find them particularly convincing. Are we really in an overheating economy? Sure we are at risk of generating asset bubbles. But I don't see any reason to cool the economy down. The QE programs have shown that the FED has no control whatsoever over inflation in the current environment. Too many hedge fund managers are acting or at least talking as if the FED was still in total control. I don't see how you solve the current mess by raising interest rates. The only thing they would achieve is another leg up in the dollar bull market. The BOJ tried it a few years ago and it completely failed. I expect nothing else from a FED rate hike. Then there is the ECB and the BOJ – what are they supposed to do? Dalio is right: The risks are asymmetric. Meaning the FED still has the power to kill the economy by hiking rates too far but it has lost the ability to ignite it at the zero bound.

Thank you, tede02. I agree that the demand for credit is the more important part. Yet, there is also an oversupply of money. The world is awash with liquidity that looks for a reasonable return. People are even paying some governments and corporations for holding their money. Essentially, "everybody" wants to be the creditor and "nobody" wants to be the debtor. So there is a demand and a supply element to it. As long as these conditions remain stable it's very hard to come to a view of inflation picking up. I think the world hasn't fully recognized this as you can see from the spreads between US treasuries and European/Japanese government bonds.

That's true, but evidently he thought that the low price was here to stay, no? If it was simply because the stock didn't follow the price drop, then should he not be getting back into the sector big time now? I think he didn't really have to forsee a prolonged price decline. There was ample opportunity to get rid of XOM when the oil price had already gone down substantially. I think it's just the risk/reward picture that changed for him. At the time Buffett sold XOM it had already become a bet on a quickly reverting oil price. Not necessarily because people were purposefully speculating on that but because they bought it because of its dividend yield, implicitly placing a bet against falling oil prices. Buffett would never own a stock because of its dividend yield. He explained on more than one occasion why he thinks that focusing on dividends to value a business is a fools errand. He looks at cash flows and return on capital. That said, I have never understood how his investing into commodity companies fits to the claim of complete macro ignorance. I think sometimes he oversimplifies things to make a certain point for people who don't think about investing day and night. It's the same thing with his gold football field story while he has no problem owning silver, or holding cash for that matter. You could tell the same football field story with dollar bills and it would even be more dramatic. Of course, Buffett knows this. But you have to pay attention to whom he addresses certain stories and what he actually does. I think he's doing it right. People don't listen all that well, the media often only report the gist of what he's saying and therefore the story of gold not compounding is far more important to Joe Average than the currency aspect of it. And to Buffett it's more important that people get the aspect of investing into good businesses and not being distracted by all the macro prophecies.

Tepper is the next Stanley Druckenmiller. A very good analyst and an incredible trader at the same time. They both have a value bent but they aren't value investors in the Munger/Buffett sense.

The best take on this I've read so far is Richard Koo's theory about balance sheet recessions. What matters for what we normally regard as inflation is the demand for consumable goods and this doesn't necessarily come along with an increase in money supply. That's because there are two options for people: spending the additional money (on consumable goods) or saving it (in any kind of asset). What people are doing since 2009 is saving the money. That's why the prices of all income producing assets have been going up. All this additional money is competing for the same finite amount of financial assets. This leads to asset price inflation but not necessarily to consumer price inflation. Rising asset prices mean lower rates. This is also part of the reason why falling oil prices didn't lead to more economic activity. People are saving the money. The central banks' problem is that they haven't figured out how to get people to spend their newly "created" wealth on consumable goods. This is the decisive and final step in the QE programs that hasn't worked so far. At the moment, people want to get rid of their debts and then build up some wealth in the form of assets. This produces pressure on rates and does therefore the exact opposite of what people were expecting in the beginning when QE was announced. What Dalio says is that the long term debt cycle can only turn when we finally get rid of the debt. He says that you can get rid of it by repaying it, by debt foregiveness or by inflating it away ("monetizing" the debt). He also thinks that you have to have all three of those options. Central banks are in the process of discovering that relying solely on option 3 (monetizing the debt) doesn't work. While being the politically easiest choice it has the disadvantage that you need the people to participate in it by spending the money on consumable goods and thereby creating inflation. Momentarily people don't want or cannot do this. That's why we have to come back to the other two options. However, the other two options are very painful. To quote Dalio: "One man's debt is another man's asset." Therefore, getting rid of the debt means, at least to some extent, taking away another man's assets – be it in the form of tax (with which you're then able to pay back the debt) or in form of haircuts. When you think about it like this it becomes very clear that this will be a deflationary process at first, that is until people are starting to rather spend the money on consumption than having it taxed away or being haircut. This is when the whole thing can finally become inflationary. In my opinion this is why Dalio says that the process is deflationary before it will turn inflationary. The fact that this process is so painful could explain why it usually takes two or three decades until the cycle turns – you have to spread the pain over time and equally among different groups of people (i.e. debtors and creditors in their different shapes and forms – which is also what Dalio is saying).

I'd say he has been right on bonds for 30 years which is quite a different thing.

I've read Shilling's article twice now but I couldn't find the word "sustained" in it. He doesn't say that. All I can say is that he has his $20 price tag on it since December when oil was at about $60. I'm not subscribing to his newsletter but I'd imagine that he was even a bit earlier in there. He certainly was one of the first people to grasp the consequences of OPEC's decision not to cut production (http://www.bloomberg.com/news/videos/2014-12-12/saudis-playing-chicken-with-weak-opec-members-shilling). I'm not willing to defend Shilling's price tags since I don't have an opinion on a certain price. However, he's one of the economists out there who have been more right than others, and mostly with out-of-consensus thinking. He's been a deflationist since the late 1980s and often been ridiculed for that. Well, if you look at a 30 year treasury chart it was a good idea to at least take him seriously. That's what I've done since I heard him back in December and I haven't regretted it so far.

Gary Shilling is sticking to his prediction of a $10-20 crude price: http://www.bloombergview.com/articles/2015-08-20/optimists-were-wrong-to-predict-oil-prices-would-soon-rise-again

I think on the equity side this is exactly right. Your view could be expressed with puts on the farther out part of the crude price curve. That's what I do because I don't want to risk too much capital on it. I hold Dec 15 and 16 puts on CL. You could also buy CL futures on the forward month and sell the backward month and repeat that for as long as you think the forward curve is too optimistic.

The companies you've picked are the best run/lowest cost/biggest/almost biggest in the US and Canada respectively. They are probably the least levered to oil prices of any producers, due to balance sheet, and the ability (and willingness) to take advantage of the downturn by purchasing assets on the cheap. This is especially CNQ, they're taking market share by buying assets from forced sellers at distressed valuations. The longer prices stay low the bigger they'll be on the eventual upswing. If you want to look at what's happened on the downside, you should look at something other than the most stable ones. Those company's would also have the most torque to the upside, as some of them have high operating leverage and high financial leverage, which makes them a lot like a call option. (Big upside, but if oil doesn't pop they'll be worth zero) Well as an investor aren't those the characteristics you look for in companies to own? If one would like more torque as you put it why wouldn't one just buy a call option on these companies or just use margin? Why buy crappy companies? Whether XOM and CNQ are less levered to oil prices, yes to some extent, but a small one I would say. The still get oil out and get paid based on the price of oil so I don't see how oil prices don't matter a great deal for them. However my point was that a drop to $83 for WTI in 2012 caused these companies to drop to prices similar to today I don't see why in the current environment the valuations of these companies shouldn't be much lower. Unless they were trading at some 75% discount to value back in 2012 I think it's more likely that they are still overvalued at current prices. Btw, I think the crappier oil companies are overvalued too. As you say they may go to zero. I think quite a few will actually do that. I didn't like a lot of these cos even when oil prices were high. You're right. I made the same point a few months ago. XOM is trading on a dividend yield multiple. It's not very intelligent to buy those stocks simply because of their dividend yields but this is how I think it works. As long as XOM doesn't cut its dividend the yield builds kind of a floor for the stock price.

There's a great book written by Diego Parrilla, an oil engineer/former GS banker. He discusses the technical advancements in the oil industry. His thesis is that the oil industry is on the same path the broadband industry was in 1999. I found it a very interesting thought experiment – it's the antithesis to Jeremy Grantham's "we're running out of oil": http://www.amazon.com/gp/aw/d/1118868005/

There are a lot of valid arguments on both sides. Yet, I think the odds that it's taking a lot longer are rising. No reasonable person is saying that crude prices won't ever rise again. But the arguments oil bulls bring forward all point towards it taking a lot longer. The difficult question is not "Will it happen?" but "How long is it going to take?" Buying too early can mean you will lose a lot of money with companies in the sector that seem reasonably well capitalized before you will make some. I think the situation is much more dangerous than most value investors think. And I'm not feeling comfortable bottom fishing here at all.

Expect oil prices to go much lower for longer before we see any meaningful bankruptcies. John Mauldin wrote an interesting article about the advancements in shale oil production: http://www.mauldineconomics.com/frontlinethoughts/riding-the-energy-wave-to-the-future

This is a chicken and egg problem. Are oil prices a leading or a lacking indicator vs GDP? I tend to think of them as a leading indicator because energy demand isn't driven by private consumption but by industrial production if you look at it from a world GDP perspective. There was a slowing down of the Chinese investment boom and then, afterwards, oil prices began to tank in tandem with other commodities.

I started to find some good values in this market but wanted to stay flat (net) with my portfolio. I'm really concerned with the overall macro environment. Therefore, I'm short SPY and IWV as hedge against my stock picks. If you count options I also own some puts on crude oil – but this is more of an insurance policy.

I think discussion on this site was very reasonable. People here are looking for cheap assets – so why not looking into the oil sector? Personally, I think it's still to early because we really haven't seen large companies coming into financial difficulties and the forward curve is still predicting higher oil prices. In the short to mid term lower oil prices seem to have a tendency to self-reinforce because of producer countries fighting for market share. In the long term however, to quote Zach Schreiber and Stan Druckenmiller, "low oil prices are the cure for low oil prices". But timing this decline is a risky endeavor. I've never quite understood why Buffett thinks that commodity producers are in his circle of competence while denying the predictability of global macro environments. The two are so closely linked. Yes, the company with the lowest cost of production wins in the end, but there can be several years with negative cash flows bringing even low-cost producers into very dangerous situations. And I don't think that he'd accept those risks in other sectors.