Cardboard
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Posts posted by Cardboard
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Sanjeev,
"Schiff is suggesting bailing out of US assets and into commodities and gold...not like everyone else isn't already there!"
I agree that commodities are popular, but not gold. It is very far from everyone being there.
About 165,000 tonnes have been mined since the beginning of time. Of this, around 30,000 tonnes is held by central banks and 80,000 is jewelry. That leaves max 55,000 tonnes as investment by individuals and institutions via bullion, coins, ETF's or about 2.3 trillion U.S. in value.
If you compare that to the size of the world stock market or around 40 trillion that is only 5.4% of the total. If you include bonds, money market funds and other investments held by individuals and institutions, gold is a tiny amount, maybe 1%.
So IMO, it is extremely far from being a bubble. I see very few rushing to buy it. I have seen people noticing the performance, but very few buying. Now, I can't say it is a bargain at this price, but I can't say it is vastly overpriced either considering cost of production and global growth of the population or demand. It is an error to look at $250 which was the depth of the 20 year bear market in gold and then to compare with today's price and say that it is a bubble because of the appreciation since. I think that $1,000 an ounce is now a long term floor or the value that will likely hold in a future bear market. Between now and then, gold will certainly become more difficult to mine, demand will have risen.
You may hate the stuff and keep saying that it does not earn interest, but it does not matter. People will keep buying it as a store of value for a portion of their savings. Then if central banks keep negative real interest rates and keep doing QE, confidence in currencies will keep on declining and there is no way to tell how high gold could go under such scenario. Historically, gold has peaked at 1 to 2 times the value of the Dow.
It is certainly not a value play, it would be more riding a trend. However, since it offers protection against insanity by central bankers, I think it is still worth a look by conservative investors. A 5% allocation or buying options while seeing it as an hedge or insurance is the way to go IMO.
Cardboard
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22 million shares is a 4.9% increase to their # of shares held and for perspective, Level 3 at June 30 represented only 2.7% of their overall portfolio.
So if this thing goes belly up, it is not like it will destroy their funds or their reputation. They will just say that things did not work out as expected as is often the case when investing and start talking about much larger positions such as Direct TV, Disney or Yum! Brands.
So the key will remain how Level 3 is doing itself to move the share price. If an investor was showing up to tell Crowe that empty promises are enough such as Peltz or Icahn it could change things.
Fairfax could do something. They are not a mutual fund like SEAM so they have the resources and know how to do M&A, restructuring and the like. They have been hurt by the Asper's with Canwest when they refused to sell their Australian business. It was not as high as Asper wanted. So they walked and then the company went bankrupt. It was a big loss for Fairfax. Abitibi is another one, although they hold debt instead of the stock. They may do better, but they could have also been tougher with management to get their house in order before filing for bankruptcy.
I think that there is a difference between activism that seeks only short term performance by forcing sales of healthy companies and activism that seeks to save companies from failure. Some managers are over confident and keep seeing a bright future while reality says otherwise. SEAM and Fairfax have saved Level 3 because if it had not been for them, terms for loans would have been much higher likely forcing a restructuring. Crowe should understand that their support is not a license to do whatever for as long as he please. When you cannot deliver any growth in sales during an economic recovery and during a continued surge in bandwidth usage there is a problem.
Cardboard
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Zorrofan,
This is quite a bit technical to say the least! 2.2% of ... How did they get that?
Another famous one, but much simpler is the Death Cross. That is when the 50 day moving average crosses on the way down the 200 day moving average. It happened a few weeks ago and the last time prior to it was in late 07!!!
Many technical signals at the moment indicate a breakdown.
The guys on this board will think that we are completely insane and they are right. The issue is that the computers have been programmed with these technicals and traders use only that stuff, so might as well know a little before they go bizurk and give us crazy valuations again. P/E's and yields must be incorporated into the black box too, but I have never seen them count for so much.
The 10 year treasury is also yelling: "the sky is falling" and GDP growth for the 2nd quarter will likely be revised downward almost a full percentage point from 2.4% due to inventories and exports. The ECRI has gotten a little better last week and this week, but it is still down 9.8% indicating a recession. Housing is still not doing well at all. So fundamentally, the computers may decide to sell as well.
At least this time around I am ready. I am 100% certain that I won't time the bottom, but if things get crazy and stocks are again abandonned, I will have at least cash available to deploy.
Cardboard
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Valuecfa,
Sorry for you loss.
I am not sure about the exact schedule of a sell side analyst, but what about time zone? Conference calls and other meetings are often aligned to the East Coast hours. For example, the guys at Pimco in Newport Beach California seem to have a fantastic location, but if I recall correctly they come to work at 4 and 5 in the morning. That would suck IMO.
Cardboard
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I don't trust the CPI either way. Our cost of living may still be going higher in a deflationary environment. Stuff that people buy everyday. IMO, it is the big ticket items that may see deflation because they usually require credit.
They have really screwed up with this QE2. Bernanke should have instead raised interest rates to 1 or 2%. One Fed member talked about that recently, so it may eventually happen.
If some people can't afford a 1% increase to their mortgage rate, then they can't afford this house anyway. Banks should do a workout with such folks if possible and then move on. For the rest of the population, a 1% increase to interest rates would be a shocker. They would then likely rush to buy that home or car that they are looking for, but are currently hesitating because of deflation: it may get cheaper, interest rates are heading down. This could have quite a positive impact on home prices and the economy. The mentality would flip up side down. With "some" interest rate, retirees would also have some additional money to spend.
Regarding the banks, they have benefited enough from large interest rate spreads. For the most part, they are now well capitalized. What would help them a lot more now and especially regional banks is more "good" activity. More lending to people and small businesses who can pay and then more write offs of questionable loans.
What is clear with the zero interest rate policy is that it does not give more money into Main street hands, benefits only to bankers who cash in the spread and creates a thinking that things must be bad.
Cardboard
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I have never seen treasuries spiking like this in my investment career with the stock market doing as well as it is. The SPY is down 8.0% from its 2010 high which does not even qualify as a correction (10% down).
I have seen the treasury market go up before while the stock market kept on going higher for a while until it played catch up, but the bond market was not at these yields or getting there so fast. Yet, they were also ignoring the warning. It was different this time, the bond vigilantes had it wrong. It is acting like there is something truly nasty brewing underneat.
I also like the logic of comparing treasury yields with dividend yields or earnings yields. Then I guess that they will dump their stocks en masse if the 10 year goes back to 4 or 5%? Well, I guess not because then they will have another justification to hold stocks.
Investors give an applause for QE2! If this is not a sign that the economy is doing poorly which will hurt earnings and that pumping money into the system has not worked so far then what is? Yet the market rally on this news.
Cardboard
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I don't know ValueCarl.
I was very disappointed to see this Google "alliance" with Verizon. Unless I totally misunderstand, it seems more like control vs expansion of the Internet.
I was also very disappointed with Level 3 latest results. These guys show no growth. They keep bombarding us with announcements about this and that deal, but they appear immaterial. This company needs to generate at least $1 billion a quarter in revenues and they were not even capable during Q1 and Q2 which were good for most U.S. companies. You would think that demand for communication services would have followed somehow the U.S. economy. And this wireless tsunamy... Nothing has transpired into their results.
It seems like a good asset, but so far they have not generated the kind of revenues required to support their cost of capital. At a lower debt level it would make money for shareholders, but that is not how they are structured. A sale would make sense to me since I am starting to believe that Crowe won't get it done. Watsa and Hawkins have been very patient and I think it is time for them to ask some tough questions. Is it the management, barriers by other telcos, technological advances? Something does not jive here IMO. Patience is a virtue, but denial is what?
They were even entertaining the idea of "accretive" acquisition on the conference call! How do you do that with a debt structure like that?
Cardboard
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Regarding Ben Graham, if you want to know what he would do, just read the Intelligent Investors. Once you have done that, you will realize that so called high quality, cheap stocks of today, are not so cheap. His perspective on asset allocation or bonds vs equities is also excellent.
One thing to remember about Graham is that he did not avoid the debacle of the Great Depression. He recovered, but his losses were substantial. His writings which were done afterwards show how scared he was by the event.
Stocks were so overvalued when I read that first in 1998 that I was shocked. I could not imagine seeing bargains like he was looking for ever again. By late 08/early 09 they were everywhere. And today, we have companies missing earnings and still flying high with ridiculous P/E's: NFLX, AMZN and others. No one will convince me that enthusiasm is not present.
Cardboard
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Carvel46,
"Cardboard: I am/have been in the deflation camp b/c we did not take our Austrian medicine, in regard to asset write-downs at banks. I don't buy the common argument that we're "earning" our way out... makes no sense from an economic growth perspective. Yes, the banks are "earning" their way out (over 10 years), but we, as an economy, are not... just look at the shape consumers are in. How is income growth?"
I am with you now. When GDP was looking like 4% growth and I saw savings rates go up, I thought that we could get out. At least that we could cut the damage by a lot. I thought that consumers had learn their lesson, would cut on debt and that we could develop a more sustainable economy. What I realize now is that the only ones who learned anything are the ones who lost everything. So many other ones are still living on the edge it is not funny. Consumer debt to income is still at 120% vs 75% historically if I recall the numbers correctly. Again, if I am not mistaken, Canadians are now at 144%. Same reality in most countries.
Cardboard
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The more data that I see about the economy, the more I believe that they are right with deflation. I was not in that camp early this year, but things have certainly changed. If GDP growth had remained strong, we could have out grown some problems, but at recent rates it is just too slow.
However, I will not put a dime into long term treasuries. I see too much risk with guys like Bernanke who could activate QE2, 3 and 4 at the same time and create massive currency debasement. If the treasury vigilantes see such action, they may become quite frightened and dump their bonds. Then we could go to a stagflation scenario.
Either way, I can't see the economy do much better until a few things occur. It certainly won't be manufacturing alone pulling us out of this one as so many want to us believe. Do you recall how tiny manufacturing is for the U.S.? It has largely moved to a service economy and there the picture has remained bleak.
Cardboard
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I mentioned before about this possibility and it is already in place:
"a) Regular grant
On May 25, 2010, the Board awarded 1,086,009 options under the regular grant to executives and key employees having an exercise price of $1.35 per common share and a term of six years from the award date.
On May 25, 2010, the Board awarded 1,135,269 options under the special one-time grant to executives and key employees having an exercise price of $1.35 per common share and a term of six years from the date of award."
We have heard about the "special one-time grant" at $3.50 and $5. They were a pretty high hurdle in terms of incentive. These above are more the regular options that we see issued by corporations. The bar is generally not set too high. I have seen corporations picking the exact bottom in their share price to issue them.
Anyway, the cost to us is not very high at about 1.7% of outstanding shares, but dilution is dilution. The more these get issued, the larger the cap on the share price. I hope that it will motivate management to put more attention toward their stock. I would be happy with $2 a share based on the current situation.
Cardboard
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1.9% GDP growth in 2011 and 10% unemployment. Is this France? Or Japan? No, it is the U.S.!
http://blogs.wsj.com/marketbeat/2010/08/06/goldman-sachs-unemployment-is-going-back-to-10/
This notion of nowhere else to go other than the U.S. with a performance like this will stop faster than you may think.
Something else that I find completely out of whack in the U.S. is that they have not taxed internet sales yet. Companies like Amazon create very few jobs with no brick and mortar stores and on top of that benefit by not taxing their sales. Some bill has been proposed, but to date nothing has gone through.
Ah! Lobbying again. A nice term to avoid saying corruption.
Cardboard
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http://money.cnn.com/2010/08/06/news/economy/jobs_july/index.htm
The latest jobs report shows a decline, but what really annoys me is that they mentioned that losses in June were mainly due to the end of census temporary jobs. Now according to some, it is the cause again in July?
Then here is another one that needs explanation:
"DJ US Jun Payrolls Revised To -221K From -125K"
Can we rely on the July report? Will it be revised lower again next month? Same thing with the oil in the Gulf. All of a sudden 75% of it has been captured or disappeared... Dispersants are not toxic, the shrimps are good...
The bulls and the government are spining this stuff it is nuts. What the U.S. needs is 500,000 jobs created per month. They need to stop the bullshit, QE2 and work on real solutions to foster innovation. They also have to accept that consumers need to repair their own balance sheets and that spend, spend, spend is no longer the solution.
What we have had here is a sharp restocking of inventories. It was very sharp on the way down and very sharp on the way up because of just in time inventory with tools such as ERP. Now, people are looking at each other and wondering if new orders will come in or if it was just demand coming back to more reasonable levels from the bottom.
Cardboard
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I always believed that comparing earnings yield and treasury yields is a dangerous game. This is a recent creation made popular by Greenspan. It may appear to make sense at a given moment, but things change rapidly and once you have made your investment, you are locked in.
If you look back in history, you will find that it was more dividend yields being compared with treasury yields and other bonds (Intelligent Investor for example). They were basically comparing the money that goes directly into your pocket following the investment. There was a lack of trust on reinvested earnings which I think is fair. If it worked out well, it was the cream on the top or the reward for taking the additional risk.
The way I look at it, low treasury yields should help corporations refinance with bonds at lower rates. At the same time, low treasury yields indicate a low growth economy meaning fewer opportunities, excess capacity and more competition. This means lower growth rates and more chances for managers to poorly allocate reinvested earnings.
If you were starting up a business, what kind of return would you demand? Would you settle for a 6 or 7% rate of return because 10 year treasury yields are just below 3%? IMO, you would likely demand a minimum 10% for the effort and risk that you are getting into.
Cardboard
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The call was pretty short, but a few good pieces of information:
1- Mentioned that the conversion to a corporation structure was essential to do the refinancing. I still don't understand why, but I guess they know better than me.
2- Annual interest savings for new debt structure are $4 million.
3- Annual minimum drop in wood chip cost in 2011 if conditions remain as is: $7 million. This is due to many newsprint mills shutting down for good in Quebec.
4- Believe that planned shutdowns in the industry in Q3 and Q4 will be sufficient to keep NBSK market balanced. Then I ask, what happens in a quarter when shutdowns are low?
5- Exported some RBK to Europe for tissue market which requires some recycled based material. That I like, it is creative. Not just running plants flat out and hoping for high prices.
6- Looking to grow in RBK. They mentioned many times the importance of being "green" and that this market will grow. My read based on what was said is that a tuck-in acquisition is likely.
On #6, it is hard for me to accept. Sorted office paper has been the killer and RBK is always priced based on BHK. Really hard to make any margin in this business. Then they are the only RBK producer in NA with air dried pulp mills, modern/low cost and already hold a 48% market share of RBK. Other mills are all wet pulp which means higher transportation costs. How do you make any money then?
Looks like that they are on the right track especially when you add the savings and the Hydro Quebec power contract down the road. However, Fairfax better keep an eye on these guys before they go after some so called really attractive acquisition and blow a bunch of this very hard earned capital that they just raised.
Cardboard
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You guys are wildly optimistic. Since when do you substract cash from the share price without taking into account debt on the other side?
These results are pretty much as expected and you could have done the same calculation that you are doing now weeks ago. The company is cheap, but when I hear people holding on for $6 a share when we just saw CFX.UN report fantastic results and see its share price come down, you have to wonder how bad is the slowdown in pulp prices that all producers have predicted.
There are two new pieces of information in the release which may help to understand why they issued shares for cash other than just reinforcing the balance sheet:
"The past few months were eventful for our organization. We completed our conversion into a corporation which allowed the successful completion of our refinancing. All this has brought financial stability and flexibility to our organization. As such, we will now be able to increase our focus on the execution of our operational and supply chain strategies aimed at improving the productivity, efficiency and competitiveness of our mills."
Plant managers don't focus on refinancing. So this recent activity should not have distracted them from looking and delivering continuous improvements unless the company is poorly managed. This sentence must be about looking at bigger solutions where cash, CFO and CEO are needed to improve their cost structure.
"The North American RBK market showed signs of improved demand during the second quarter. Some of this additional demand was brought about by the closure of a competitor's mill having filed for Chapter 11 bankruptcy protection. Customers also reported better order books for recycled paper."
I believe this is Mississippi River Corporation. Looks like that profits are hard to come by in this RBK market which is good for Fibrek. It could mean capacity removal and even some consolidation opportunities.
Cardboard
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Beerbaron,
Goodwill is no longer amortized in Canada just like in the U.S. I think that both countries adopted the rule at about the same time. Goodwill is also not tax deductible. What they do nowadays is to review the goodwill value once a year to see if there is an impairement or not. If so, they write it down to the proper value which gets substracted also from equity.
Intangibles is a different story since it includes software and some rights that have true economic value. These are still amortized and are tax deductibles, although you will have to dig into the tax code to find out the rate for each type.
Cardboard
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The pile of cash waiting to be invested argument is a joke. We have heard the same thing back in 2000-2003. It is propaganda from the perma bulls and you never hear what is on the other side of the ledger. They were also talking at the time about a job less recovery following the very short recession. The market only started to go higher once the housing boom resumed. Construction activity is a huge employer.
The other thing to keep in mind is that most technology companies had very little debt in 2000 and some had a pile of cash. When earnings declined, the stocks went down 50 to 90% anyway. Some stock prices never recovered. How the economy recovers here is much more important than some seem to think especially when you are paying multiples north of 10 times.
There are also sectors of the economy where leaders and investors have not learned anything from the crisis. U.S. REIT's is a prime example. Current yield is 4.4% or a very small premium to 10 year treasuries considering that there is very little growth in funds from operations and that payouts remain very close to FFO. After some maintenance capex, there is no money left to invest or to repay debt. Cap rates remain very low. The only thing keeping this bubble alive is the debt market feeding them with low cost debt and Goldman/others issuing shares for them to investors chasing yield. Almost a ponzi scheme.
Cardboard
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I continue to regard this market as extremely dangerous. It could seize up at any time. All is needed is a small unforeseen event and they happen much more often than we expect.
IMO, the real issues that have created the crisis have not been solved: total debt in the system vs GDP and excessive risk taking to generate returns. On the latter, think of things like reaching for yield, carry trades, insane P/E's paid for some growth stocks, derivatives and now we have flash orders.
Retaining some cash or hedging at this time seems more than adequate. While I agree that Prem has a business to protect (insurance capacity), there is no reason for an individual investor to not be demanding on a price to value basis. That is the swinging on a fat pitch part. There are still some bargains out there, but they are nowhere near as prevalent or as fat as they were.
Regarding Buffett, I would like to point out that the guy was fully into treasuries before the crisis in his personal account. He also had a mountain of cash at Berkshire. This is hedging. He was on the sidelines waiting for fat pitches to show up.
Cardboard
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Large changes that I see from Q1 to Q2 on the investment side:
- Sizeable reduction in their common stock holdings.
- Big addition to U.S. treasury holdings (long term bonds) from $500 million to around $2 billion.
- Significant position in CPI-linked derivatives. I am not sure if they are the same as the small position disclosed in the 1st quarter, but these ones are clearly to protect against deflation not inflation: "... economic hedge against the potential adverse financial impact on the company of decreasing price levels"
- Addition of a big swap against Russell 2000.
That is about as negative as it gets on the equity market.
Prem mentioned before that very few investors survived the Great Depression. He then became less negative after November 2008 and only hedged 30% of the stock portfolio in late 09 following large gains in the market. Also, sold most U.S. treasuries. Now we go to 93% hedged of what they consider cheap stocks, profit taking in what was likely considered fairly valued and massive protection against deflation.
Cardboard
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"If there is slowdown, it is an opportunity to make more money."
Hence my point. IMO, it is not a bad idea at the moment to be hedged or to carry some cash on the sidelines. You won't make any money from a slowdown unless you have cash available and/or will be willing to let go your cheap stocks for cheaper ones. That is unless you manage a fund or have a large salary vs your investments where money keeps coming in every month.
I do hold some small companies at the moment that I believe are very cheap even per late 08, early 09 valuations, but I would be careful to venture elsewhere.
I think that people also forgot one key metric. The S&P has been trading at 14 to 15 times earnings on average over the past century. This means that the biggest and even most stable companies, but growing slowly (5-6%) should not deserve a much higher multiple than the average. If you are able to buy them at these levels, then you should expect the average return from the stock market over the past century. Not 20%. I sense some investors salivating at these big caps valuations, while for the most part they are just normal and these earnings projections always ignore the cost of severances, write-offs, disappointments and the delay in earnings accummulation that is created by an economic slowdown. I see too many people expecting to make a fortune with the likes of Intel, Microsoft, P&G, UPS, JNJ, Wells Fargo and many others at current prices.
So I guess the current attractiveness of the general market depends on your rate of return expectations. 25-50% a year is what thrills me. IMO, that is the reward and logic for an individual spending a fair bit of time investing. Deals like that are just much more rare than they were 12-24 months ago, so my guard is up. If I was looking for 8-10% a year or kind of match the market, I would give my money to a few good funds, buy a few select large caps and play golf all day or find a different interest.
Cardboard
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http://dshort.com/articles/ECRI-Weekly-Leading-Index.html
I thought that the reading would somehow get better this week, but it is just the opposite. There is nothing perfect out there, but this index has never failed matching a recession since the early 70's at such declining rate.
The stock market at the moment is extremely optimistic dismissing any bad news. Just watch what happened with AMZN yesterday to see what I mean. At the same time, it is acting very negatively with some stable companies. Flash trading, PPT? Logic is certainly absent out there. This whole thing could flip the other way in an instant.
While earnings are currently quite good, revenue growth appears very weak. There are also many issues that may resurface at any time: sovereign debt downgrades, Iran, North Korea. The entire focus has been on earnings, but after that what will they think of?
I won't deny that there are some attractively valued companies out there, but you have to be very selective, be prepared for 2 to 3 years before this value surfaces and ensure that they can survive a major air pocket. Seems like a great opportunity to let go companies that you may not like as much as others.
Cardboard
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I understand the economic excitement around rail companies moving around more goods, but their stocks seem to reflect a lot of good news.
CN for example is trading at 15.7 times their revised 2010 EPS forecast of $4.05. If you want to factor growth in the equation, it is trading at 12.0 times 2012 EPS forecast of $5.30 (who is ultra confident in their 2 year forecast?). The dividend yield is 1.7%.
These are not cheap multiples for companies that are cyclical and actually always investing more in capex than their depreciation. So the real P/E is actually higher since most of this capex is maintenance. Also, keep in mind that these earnings forecasts are actually a near best case scenario. They never factor in disruptions which always tend to occur.
If the growth in earnings materializes you have a compounded return of 16% including the dividend over a 2 year period assuming the same P/E as today. It is good, but there must be stronger returns available out there if the economy strengthens per these earnings forecasts.
Cardboard
scary article
in General Discussion
Posted
Sanjeev,
"And where are they going to go? High-yield, high-quality stocks with strong cash flows and dominant market shares."
While I agree with you for the most part, I am getting skeptical of these stocks. They keep salivating about them on CNBC. Many many hedge funds have loaded up into these stocks as part of their "de-risking". And are they that far from fair value?
Then you have crazy stocks such as NFLX, AMZN, trading at 48-50 times earnings. Missing earnings and still going higher. OPEN is another one at 89 times earnings. All growing fast, but are these multiple sustainable? 1999-2000 anyone?
Then we got this massive hunt for yields in treasuries, corporate bonds and others.
So I am not sure that gold is risky at all at this price considering the above. I too bought gold and also silver when it was $300 and sub $5 respectively. Felt very lonely at the time. I see also the ads, but I see more activity toward dumping some old jewelry than buying.
It seems that what we have now is a massive amount of money looking for a return wherever it can find it. There is no fear of loss. Just fear of having money sitting in cash. This market looks very very dangerous to me. It would take very little for people to scramble for cash. The value, margin of safety in almost anything appears very thin.
Cardboard