Cardboard
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Posts posted by Cardboard
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Well, I agree. If the world does not end or if things don't get too bad so they don't have to recapitalize or take a significant cut to their equity, the entire financial sector is cheap. Canadian or U.S.
Power Corporation is an interesting one since it is in a net cash position, trades close to book and has a yield around 5.4%. I have not looked at it in details, but since it is a holdco, I assume that they are not liable for any liability at Great West Lifeco which is probably the only thing risky in the whole company. The rest of the organization may see a slowdown, but won't go bankrupt or need capital injections. Of course, if GWO goes BK, then it will be a big negative to their net asset value.
The problem I have at the moment is balancing upside vs risk. POW seems like a nice company, relatively safe IMO. On the other hand, I don't even see a double at current price. Kind of a mini Berkshire with very smart people at the helm, well connected and looking to grow the value of the company over time.
Cardboard
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This message is for the investors who are still finding value in this market and already have a large portion of their net worth invested, but that are worried about a Europe debt implosion along with a significant slowdown in China and possibly a real estate crash there.
How do you hedge that risk in your portfolios currently?
I also want to ensure that people understand what I mean by depression. It means that business becomes really bad. That most companies have a hard time selling their goods. That they are losing money on an EBITDA basis and liquidating their inventories. The current E mostly disappears and we are not sure for how long. Permanent loss for a great deal of your companies since they turn bankrupt. It is not a temporary event, but one that could last a few years and have real lasting damage.
While I cannot predict that risk with any certainty, I don't believe that the probability is 0%. If both China and Europe come down hard, and we are seeing some real signs of that currently, we may experience such event. At the same time, history shows that investing in such instance of fear as we see now (at least in many stocks) is the way to go. In essence, the problem I have is that value is relative. It is based on some assumptions about the future. The way I see it, is that we will have some resolutions, but I don't know how, when and if it won't be combined with other shocks that are not anticipated currently.
Cardboard
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Salesforce.com is already diluting. Their convertible is in the money and they are issuing stock options like there is no tomorrow. However, these shares do not exist according to "management's non-GAAP" results.
After the stock being in neutral for about a year, I think that the billing miss in Q3 is now being felt by investors. As it moves into a show me story after the break in momentum, pressure on the stock will keep on building. Then someday maybe that we will hear from big mouth Herb Greenberg about accounting and other things at CRM.
Cardboard
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I have watched the BBC interview and I think it is hard to question his thinking. However, what is the real solution? He mentions that sovereign debts have to be written down. Fine, but then what? Many banks and insurance companies will take a major hit to their equity and some of them will face bankruptcy. Then banks won't want to do business with each other, credit markets will freeze and then the governments will be forced to inject money to prop up the banking system and will increase their debts once again. Sovereign debts will increase. A circular issue if you will. Looking at the U.S. we have a good example. It is not like the issue is solved. Austerity or large inflation are not pretty ways to reduce the debt load. Then Japan.....
Some nations with stronger balance sheet could help such as Germany and China, but by how much really? Enough to make a difference?
It just does not seem solvable. What do you see in our future that will put that issue to rest once and for all?
Cardboard
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Hi Txlaw,
"Cardboard, don't worry too much about DELL.
What the market and many smart people fail to understand is that our DELL stake is like WEB's buying into IBM . . . only before the market figures out what's going on.
As WEB pointed out with his IBM stake, having the share price stay stagnant or even go down isn't so bad, since DELL really cares about its shareholders. They'll buy back shares and continue to do what needs to be done with operations.
2014 LEAPs might be a good idea for DELL."
The problem I have with big caps in general is simply the lack of upside vs small caps. So yes, I am typically buying these with options which adds a whole lot of complexity and headaches especially in this market dominated by macro. Time becomes your enemy.
Regarding Dell vs IBM, I tend to disagree about them being similar. IBM is much more about services. It is more of a contractor or an engineering firm. They will do whatever the customer want. This can be "retooled" with a change in people skills while Dell rides mostly on equipment making which means big plants to be retooled, inventory changes, etc. I think I can envision better what IBM will be doing in 10 years and its margins than Dell.
Buffett nowadays is just a DOW buyer or very large S&P 500 stocks. He will pick whatever stock in that group that has a clear 10% return. He has no choice, he is just too big. IBM said that they are targeting $20 in EPS in 2015. With share buybacks, a management team that has delivered and some moat, this objective looks achievable. Assuming a 14 P/E, that is a $280 stock in 4 years from now or a 13.5% return. The P/E and the E may not end up being exactly that, but that is close enough for him. Then you have him trimming Kraft and Johnson & Johnson because he likely believes that they won't be able to get close to that 10% a year (my guess on how he looks at it based on his actions).
While I like the certainty of the return, 13.5% a year is well below what I have done historically. I deal with a lot of volatility, but I have done better. I keep my fingers crossed that I will be able to keep going in this wicked environment. So for me to consider IBM, I would have to go with options. Again, it is a cost and timing problem. For me to win, I need a revaluation or the stock to follow earnings in say 9 to 18 months. It is asking for a lot. While for investors to look at something like a DELL or MSFT differently than today and their future may take much longer or may never happen.
Cardboard
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Based on these comments Sanjeev, did you sell out of Microsoft?
I did because I had "better" opportunities coming up in this latest market rout, but I am still in DELL and it sure is discouraging. The company beat EPS expectations by something like 15% last night or $0.54 instead of $0.47 and instead analysts focus on why they did not do more sales in the low margin side of the business???? And, what will be the flooding impact on hard drives?
You have a business selling for 7.4 times earnings or 5.5 times net of cash with no sign that the business is disappearing, well managed, and the stock price goes nowhere. Microsoft acts the same way and I would say that Apple too if it was not for the very large growth rate in earnings which is the only thing that moved up the share price. The P/E is very low for such rate. Some posters are talking about RIMM on a different post. Even if the company hits the $5.25 in EPS that they are talking about which makes it a 3.7 times P/E will the share price advance at all?
With the amount of doom and gloom by analysts and the never ending worries about these businesses disappearing, I think that the only chance to make money over time on them is for earnings to remain somewhat stable and for these companies to pay all cash flow and cash on hand to shareholders via dividends or massive buybacks. Cash to the owners or a large shrinkage in shares to increase the E. For them to retain so much cash seems to be a curse or a cause as to why we should be worried about their businesses.
Cardboard
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How do you put that genie back in the bottle now? The Greeks will now demand a referendum.
Then how long does it take until the vote is counted in? 2, 3 months?
Crazy... The Eurozone now needs to make an example of Greece and make them pay for their arrogance. This country does not seem to get that they are the ones who put themselves under that situation. If Europe bends, then the other PIIGS will ask for more too. You have to be responsible for your acts at some point in life.
Cardboard
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What about the CPI running at 3.9% annualized for the economists out here?
http://www.bloomberg.com/news/2011-10-19/u-s-september-consumer-price-index-report-text-.html
Of course, if you back out food and energy it still looks better at 0.1% for September, but it is still 1.2% annualized. The 12 month figure ex food and energy is at 2.0%.
So yes, you can seek refuge in cash during these uncertain times, but please understand that you are losing your purchasing power weather there is a recession or not. I also wonder how long the bond vigilantes will stay calm with their yields below the CPI or at par with the ex food and energy?
Cardboard
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"maybe whitney had to dump his stock?"
I don't think so. I did not hear of Bill Ackman dumping is!
What a puppet! I simply could not believe him pumping JC Penney this week following Ackman reco.
Cardboard
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AZ_Value,
"If the US is producing millions of college graduates that start their adult lives with tens and tens of thousands in debt then it is no longer their problem, it is society's problem because society has failed them."
Well that is a very interesting issue especially in the U.S. I have had co-workers coming from the "elite" schools like Yale, Princeton and others and some from state universities. Maybe that my company was great at only finding top talent from the state universities, but I really could not find a difference in intelligence, skills or overall behavior between them. The main difference is that the guy from the state school did not end up with a yearly tuition fee of $40,000. His start in life was definitely easier even if the company did not give him a $5,000 signing bonus.
Personally, I would have no issue with education being paid fully by the government and for people living far from main centers to receive financial help for their cost of living. On the other hand, I have a problem when I believe that the majority would end up studying in fields that are not in large demand by society. The majority don't like math and science, but that is what is mainly needed. It would be interesting to see what France has achieved with free tuition (I believe it still is) vs the U.S. I would think that in the U.S., you will pay more attention to job perspectives before entering college. It is a tough issue to address properly.
Regarding teachers, policeman, fireman, nurses and the like, they sure don't seem poor in Eastern Canada. I could see them getting in trouble in Toronto or Vancouver where real estate prices are prohibitive, but not here. Good pension plan, good salaries, care coverage and job security certainly give them a solid middle class ranking. However, if they had the kind of debt coming out of school like is often the case in the U.S. I could see them having some trouble.
A solution IMO is for the very expensive centers like New-York, San Francisco, Vancouver and other to pay a "special" tax for people performing essential services. It does not make sense for them to receive the same wages as in lower cost areas of the country. So the rich who contribute to inflate real estate and all other living expenses in these areas would need to pay to ensure that they obtain proper services.
Cardboard
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While I agree with Buffett that every tax payer should pay its fair share, I really don't see what it is going to do to help the middle class or the poor. The inequality between the very rich and the others comes from too high salaries paid to executives, too high salaries paid to stars and athletes and the greatest force in the universe according to Einstein or compounding interest. While the "old" middle class and the poor suffer from globalization (many can now do what they do) and poor management of their finances.
On the latter, I simply won't accept things like they "have done everything right". They have followed the crowd for the most part and saving money is not a priority. Much more important to be like the Jones.
Unless people in developed countries go for more specialized skills, they will get poorer or trend closer to same skill workers in developing countries. Having been involved in sourcing studies in manufacturing, I don't see how that
can be avoided.
So I think that Buffett should go 2 steps further and support education and really push for a complete reform of board of directors. How they are elected and how they decide on proper executives compensation.
Cardboard
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Thinking now about my experience, I believe that both Mungerville and Moore are right.
In a way, I have been hedging since 1999. At the beginning, I was almost all in cash due to the extreme valuation in the marketplace where very few bargains were available.
Then after that came good years until 2007 where plain vanilla value investing worked great. The hedging part is that I had to lower down my intrinsic value targets vs what worked from say 1995-1999. I used lower valuation metrics as fair value.
In 2008 and early 2009, I had to keep rotating my portfolio from cheap stocks to cheaper ones. Another form of hedging if you will by getting into more and more coiled springs.
From mid 2009 to today, I once again reduced my intrinsic value targets from the ones used from 2000-2007.
I guess that is one form of hedging. The market is simply not willing to pay the same multiple over time and that is due to macro. So while not entering a "true" hedge or short, I was in a way shorting the market as a whole by lowering the valuation metrics that I should use to buy and sell.
So if people are willing to pay around 16 times earnings today for Coca-Cola and were willing to pay 50 times in 2008, you know that something fundamental in the market has changed. So your cheap stock in 2008 at 8 times earnings might have had a good chance to reach 16 times, but it might not be the case today.
In any case, stocks should always be attractive on an absolute basis. If not, you should be out like I mostly did in 1999. But, other than for these extreme periods of overvaluation which seems to come about every 30 years, just adjusting buying and selling based on what the market has to offer at any given time seems to work out pretty well. You don't really have to think about it. It is just about continually looking for better bargains than what you currently own.
Cardboard
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I believe that the only logical way to "enter" the market is to be or near fully invested at this time. There should be enough bargains out there to fill one's portfolio quite easily. Then if the market drops further, you need to sell your cheap stocks for cheaper ones. It is tough to do, but the only way that makes sense IMO.
Hedging with cash, puts, short sells, etc. is speculation. You never know when to pull the plug. There is no signal telling you that it is time to unload unlike a stock that approaches your estimate of fair value on the way up. What is capitulation? When are the sovereigns issues going to be resolved and what does it look like?
If you are short now, what do you do? Take all, some or no profit?
I guess if your definition of a cheap stock is 3 times earnings or half of net cash, then you will enter the market after me, but you should still sell these stocks for the ones at 2 times earnings and 1/4 of net cash as the market moves against you.
Cardboard
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They were right on the verge of declaring one last year and I don't know why they didn't since their indicator was a really large minus figure or one that you would see clearly in past recessions. Had it not been for QE2 and the Tepper rally, they would have declared one. They were just a few weeks away from doing such, but then the market turned and they disappeared.
So basically, I decided to completely ignore this bunch on a go forward basis.
I truly hope that Buffett is right on no recession and he is not just playing politics. If not, this is looking like a 2nd Great Depression guys.
Cardboard
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"Not much Warren can do right now if he wants AIG. He would either have to do a deal with the Govt. or Berkowitz and I don't see that happening anytime soon."
A deal with the government could happen tomorrow morning. They want out and they hold 77%. I recall that Berkowitz has an average cost in the low to mid 30's so he would likely accept cash or Berkshire shares for say $40. Indeed, I think that he would be quite happy to get such proceeds with everything that has happened recently.
Regarding the tax assets, they are not on the books right now which understates book value as mentioned by Merkhet. The tax code mentions a 50% haircut to these NOL's if a change of control occurs. However, it is quite a bit more complicated than that with the value of the equity at the time of transaction being considered. So, based on my understanding, 50% is the worst case scenario. That is another asset that Berkshire could rapidly put to use while it will take a long time at AIG.
Regarding Berkshire, I did not mention that it would take a catalyst to make me buy it. The problem is that every time that Berkshire gets cheap, I find other companies much cheaper. On the other hand, they are much more risky. It is a risk/reward thing. With the help of some diversification, I tend to gravitate toward the riskier side. Over time, it has been rewarding, but I do get worried once in a while.
Berkshire would offer me a nicer sleep. However, if you think that Berkshire currently is worth 3 times book then I will sell everything and put all into it. I just don't think that is a reasonable assessment of its value. A combination of book, profitability and sum of the parts should give a decent view as to how much it is worth. I get something around $160,000. In a few years, it should be higher with whatever he does to increase IV.
And yes, I do factor in what I think the Street will be willing to pay. You can do a lot of fancy math and end up with a fairly high assessment of value, but unless someone is ever willing to pay such amount, you are fooling yourself. That is true for every company that I hold. That is also a reason why many value investors chose to sell their holdings at 90% of their calculated intrinsic value.
Cardboard
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No doubt that the stock is cheap, but it has almost always been (not to the same degree of course). So IMO, you can't assume a very high price to book in your valuation. It is also tough to see a catalyst as it is with almost any of my stocks. However, if the economy improves, BRK business and share price should do quite well from here.
In terms of opportunities, I still think that Buffett should take a close look at AIG. I see a lot of value that could be created under the Berkshire umbrella with this really large insurance business. Float returns improvement, lower cost of funding and the ability to say no to poor underwriting would do wonders. This thing could be acquired for book, maybe less.
Cardboard
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Raising margin requirements? Again?
This sounds like possibly good news coming from our governments. You can't have gold skyrocketing with further announcements of QE or some kind of European bailout. It negates their effect. Gold and silver have now been so badly beaten up that they will have a hard time moving up at all or attracting buyers even in the face of potentially highly inflationary moves. Initially anyway.
Cardboard
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Isn't during the Bush years that stock options became expensed through financial statements?
So basically, Buffett is able to influence the government weather it is Democrat or Republican led. How did he do it? By providing sound rationale and complaining for years in his annual letters about it. That is what he does best: using his head, using logic. And for that, you need to be totally free. You can't be in bed with either party.
That is what I liked about the guy before. Other than by seeing his picture on some books, I had never seen him on TV. He was like a mythic figure. Whenever an investment showed up on the 13 HR, I had to figure out why he had bought it. I had to reverse engineer his logic. That made me a better investor. Nowadays when he does a big move, he is right there on Squawk Box or on an airplane with Becky explaining at large why he is doing such. My homework is much easier, but I also learn a lot less.
That is why I said that I preferred the Warren away from the media and politics. And I still think that if he had given just $1 billion to the U.S. government instead of all to the Gates foundation, that he would have been remembered as the guy who gave a billion $ to the U.S. government in voluntary tax instead of just Warren Buffett the multi-billionaire. An op-ed in the NY Times after that would have been much more powerful.
Regarding Obama, I am simply disappointed with his performance. The government was not disfunctional during his first 2 years. It was all in the hands of Democrats! They screwed up royally in terms of job creation. I know that he could not have fixed housing or a big contributor, but making the U.S. a leader in clean energy was right there. He did not have to talk about cap and trade which killed the project because of politics. The idea was to talk about energy savings, new energy technology and people would have followed through. Natural gas also seemed like the enemy of the administration while it could have provided a big relief to oil imports and with it a big help to the deficit. Then what was done in terms of infrastructure? I see not much difference from before. The U.S. is certainly not the big construction site that he could have been.
And for all of that, I am not talking about fully funded government spending but, mostly encouragement. A leader should point in the right direction, provide vision, not do the work or give all the money.
Cardboard
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"I disagree. The freefall in MS/JPM has to do with declining activity in the investment bank-principal transactions (of which operation twist simply worsens) and little to no M&A activity. You really think money is flowing out of JPM on solvency concerns? And what bank is the money going to if there are JPM solvency ("fear for survival") concerns?"
You are right with the fundamentals although, I will not agree that they explain the kind of declines and certainly rate of decline that we have seen and in some of the strongest banks. Some are trading well below book value which would equate to very low returns on equity or some bankruptcy risk.
IMO, the issue is 2008 all over again, except that now the U.S. is more on top of the pyramid. European banks would fail before with their current unadequate capitalization and higher exposure, but even JPM cannot survive a true domino contest with equity to assets still below 10%. That is still a huge amount of leverage leaving little room for error. Better than the 30 or 40 to 1 that we have seen, but still high. Then you have the notional amount of derivatives (and JPM is king of derivatives) that dwarf any capitalization ratio that you may use.
Global banking is made up of members that you simply cannot remove. They are all too big to fail. It all comes down to counterparty risk and trust. We are back to what El Erian described quite well before with an analogy.
When you pay your food at the first drive-tru counter at McDonald's, you trust that the food will be handed over to you at the second counter. If this trust disappears, then business is over. It is the same with your money being available at the ATM when you walk to it. If a majority even start to think that it may not be there, we have a huge problem.
Cardboard
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Don't worry the market has noticed. Both Citigroup and Bank of America are close to break their 52 week lows while JP Morgan has and Morgan Stanley is in a freefall. There is much more behind these stock drops than just a reduction in yield spread due to twist. There is a fear for survival. It needs to stop very soon or the dominoes will start to tumble. Not sure if a European TARP is enough this time.
Does any of you has good contacts to buy penicilin and antibiotics? I have no problem finding canned food, guns and ammo, but medicine are tougher. ;)
At this point or rate, I am not even sure that we will make it until Dec 21, 2012....
Cardboard
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Myth, I would say the same thing if Romney or Perry becomes president and act the same way.
Obama had a huge chance to move the country forward. The stock market and confidence started to move in the right direction just around 3 months after his inauguration. Instead, the energy and momentum was spent on an healthcare bill that does not seem to please the majority, trying to place caps on emissions, chasing the ones to blame on the housing fiasco (ended up being the surviving banks who are needed to help the recovery), an $800 billion stimulus package that went where?
The reality is that the ones who tilted the balance to make him president: young black and hispanic who came in great number to vote, where before showed little interest in elections, are the ones who have suffered the most during his term. Their unemployment numbers have skyrocketed.
Way too little was done on regaining momentum which is done with job creation. Lots of social programs, pleasing Green Peace and helping the unions at GM and Chrysler. Nothing or very little was done for the private sector to create jobs. Nothing or very little was done to make America a leader in some new sector via investment and innovation.
Seeing that, the American people decided to switch to Republicans at the House and now, nothing gets done whatsoever. Gridlock in the midst of a depression with two groups as boneheaded as it gets.
Cardboard
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My admiration for Buffett is declining by the day. I liked him so much more when he stayed away from the media and politics. Another thing that Buffett does not impress me with is this lack of leading by the example on the taxation debate. Tough to have credibility when you have spent your life avoiding them.
IMO, Hillary Clinton would have been a much president (call it Bill's 3rd term if you wish) yet he endorsed Obama and he is still today. The guy has done very little for his country so far and is likely to continue. He is totally unable to make deals with his opponents. Negotiation certainly does not appear to be in his skill set. Boehner is no better, but I think that a president needs to put the well being of the country ahead of a party line.
The best thing I have heard lately is a suggestion from Nelson Peltz who suggested that Obama should not seek re-election and use his remaining 2 years to do what is right for the U.S. instead of this constant pissing contest between far right and far left. I won't hold my breath on that one.
Cardboard
How to hedge a global depression?
in General Discussion
Posted
Well Moore, as a fiduciary for your clients money, I am a little disappointed by your answer. Your defense seems to be that if things go to hell that anyway you did as well as Einhorn, Buffett and others. It may work for your situation and I can appreciate that you are following your mandate, but if you have a chance to do something then it would also be to your advantage.
Basically, I am in the same situation as you are currently except that I don't manage OPM. I am fully invested and I have a small short position which may not make much of a difference if things go really nasty. I see value out there and trust me I have bought it. However, I do stress test my companies and wonder what would happen if different events occur. I can tell you for certain that some will not survive a depression.
So what I have been searching for is an hedge with asymmetric payout. To date I have not found that instrument. The other thing that I am moving towards is income. My portfolio has allowed me to live comfortably by being able to sell winners once in a while. This year has been tough and disappointing with many deals not occuring. So being forced to sell your cheap stocks to live is unfortunate. I would imagine that it would be similar for you if you face redemptions.
In essence, I don't care about volatility. However, I do care very much about permanent losses due to companies going bankrupt or facing events that will dramatically lower their value for real. A really bad economy can do that, but I have no way to predict it.
So here are the solutions that I have been thinking of:
1- Increase income: dividend paying companies, corporate bonds with something special
2- Increase the quality: eliminate cyclical and companies having a fair bit of leverage
3- Shorting: have to be very selective. A problem is that you are speculating as to when to cover. No bell will ring, no value will be more right than another unless you are lucky and it hits your target before rebounding.
4- Some asymmetric hedge?
5- Reduce my expectations: I have always invested mostly in smaller cos since my goal was to find companies with very high upside or very large deviation from intrinsic value. If you are wrong on 1 or 2, it is fine since the rest will more than make up, but if you lose 10 because of a calamity, you are back to square one.
In essence, I would appreciate if you could share how you approach risk in your portfolio. That is what my original post was about. A BP would have a much better chance to survive IMO than say BAC which would survive, but not likely its current shareholders.
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