bmichaud

Cullen Roche of Orcam Financial Group had a great quote this morning regarding so called "market timing":

http://pragcap.com/visualizing-bob-farrells-10-investing-rules When_All_Experts_Agree....bmp Real_SP_500.bmp

DIY pyramid scheme analyzer.... http://www.pyramidschemealert.org/PSAMain/resources/5steps/5steps.html

Monish is not on CNBC the day after a "whale" enters a new position touting it as his own (HK Dollar, JCP etc....)....nor is he on CNBC with his secretary cloning WEB.

They'll occur...especially when markets are extremely volatile, because the psychology has not changed. If you remember what things were like in late 2008 and early 2009, most value investors were out of the market and analysts were wringing their hands because they didn't even have time to adjust target prices as stocks fell. How many people bought GE at $6 or WFC at $9? How many bought BAC at $5 a little while ago. I remember no one was buying SHLD short-term debt...maturing in just over a year and it was trading at 65 cents on the dollar! With more attention and more eyes on the markets, plus all sorts of dark pools of capital, I think we've actually compressed time frames and you get far more inefficiencies in prices. The one area where there are truly fewer opportunities is arbitrage where computerized trading has just been able to exploit it to their advantage. Cheers! This is precisely the key argument against the case for small caps being under followed and thus inefficiently priced..... The more Wall Street clowns looking at BAC or any other large stocks, the more likely the stock price will reflect the emotional bias present in almost every Street conclusion. With Street research you get a double whammy (in a good way!) - tons of information on companies and industries at very little cost, and inefficiently priced stocks due to short time horizons!

New Montier paper Hyperinflations_Hysteria_and_False_Memories.pdf

anyone listening/watching right now? I think there is a very big chance he takes this private....

Margin debt nearing all-time highs.... http://pragcap.com/nyse-margin-debt-stalks-all-time-highs

With more here.... Advisor_Bullishness.bmp Fund_Managers_all-in.bmp U.S._Equity_Composite_Sentiment_Indicator.bmp Aussie_Dollar_COT_Positions.bmp

These sentiment indicators would indicate otherwise.... Sentiment_Chart.pdf Global_Risk_Appetite.bmp Hulbert_NASDAQ_Sentiment.bmp

I'm pretty sure Icahn soesnt have outside investors in his fund...so unfortunately for Ackman, Icahn can f$ck with him all he wants with few reprecussions, if any.

I'm not at a computer right now, but if you go to the "how much are you allocated to cash" thread, I posted some sentiment charts. Investor allocations and sentiment levels in the US do not at all reflect pessimism. The bull case is stocks are cheap relative to bonds and the only possible thing to hold in this environment...

Was merely illustrative. If it's worth $40 and you sell it at $40 waiting for it to get back down to $20, that's not timing....which was my point. I think we all agree on the micro on this point; the issue is applying it to macro (at least if I understand what you are talking about well enough). From my point of view, it is hard enough to figure out IV for an individual company--attempting to know IV on a market level seems very hard, and I certainly don't think I could profit from my own market calls very well (e.g., you can be wrong for a long time before the market corrects). If your system works at a macro level, then I'm glad for you! (As a side question, haven't you been concerned at the macro level for more than a year at this point? Did this cost you gains in the short term that you are hoping to recoup if/when a market correction happens? Basically, is your system yielding you more gains than you otherwise would have?) As to calling it "timing", I think that just comes from a heavy skepticism about whether such macro calling systems are reliable and/or profitable. Micro calls are tricky enough as it is. My attraction to value investing is its simplicity in concept--making macro judgements takes me well out of the simple concept and into areas where we can be easily fooled by trends/models/etc., at least in my opinion. Awesome response, seriously. Yes I effed up early last year. Fortunately, I reversed course quite quickly and learned from it. In a nutshell, I was purely looking at the broad market valuation and concluded the risk/reward was highly unfavorable. What I did not take into account was sentiment (of various forms....). So the overall risk/reward was not in my favor - valuation was, but everyone was so negative that there were only buyers remaining in the short-run. So now I look at both.... Lesson learned - sentiment rules in the short-run.... For example, sentiment became extremely negative after the election. And even though valuations still weren't favorable, I was loading up in order to take advantage of the extreme pessimism. Right now every single aspect is lining up in favor of being defensive (extremely?)... 1. valuations suck - GMO is projecting less than 3% per annum over next seven years 2. optimism is at absurd levels 3. Citi Economic Surprise index is plummeting - i.e. the market is highly susceptible to downside surprise at the moment..... Not saying BAC and AIG are not cheap long-term....I just think things are lining up for a very ugly sell-off that will provide many more opportunities in aggregate that will supercede whatever is available right now.

Email blast from Kiron Sarkar today.....interesting comments on Draghi's comments vis a vis the OMT programme: Australian consumer confidence rose by nearly 8% to 108.3, the highest since December 2010 and the 4th consecutive monthly increase, reports Westpack. Importantly, traders reduced the chances of an interest rate cut by the RBA next month by 10 points to below 45%, from above 50% ahead of the release. The A$ rose on the news. Pretty confusing data from Australia recently; India’s January trade deficit widened to US$20bn, one of the widest ever and up from US$17.7 in December. A rise in oil prices is not helping. The Rupee was relatively flat on the news. The Indian government is seeking to sell more assets in a bid to curb its budget deficit next fiscal year. Whilst for the wrong reasons, the outcome is great. The Indian government has exercised far too much control over large businesses; Interesting comments by ECB President Mr Draghi in Spain yesterday. He praised the efforts of the Spanish government - well he had to say that. Much more importantly, he stated that the ECB's OMT programme would only be used “if there are major problems in the transmission of monetary policy and if there is strict and effective conditionality attached to an appropriate European Stability Mechanism programme”. Hmmmmm. That suggests to me that countries who have been preparing to use the OMT programme (Ireland) won't be able to do so, as there is no panic in the markets. In addition, the EZ has to impose a serious stability programme on the relevant country. It also suggests the yields will have to rise much higher for countries such as Spain and Italy before the ECB is to step in with an OMT programme. I sense a subtle, but I believe an important change, from that currently believed - markets have ignored Draghi’s comments; German wholesale price index rose by +0.3% in January M/M, as compared with unchanged in December - oil price related?; The Swiss government has ordered banks to hold additional capital to guard against rising property prices. Banks will have to hold a further 1.0% of risk-weighted assets, which are secured against residential property; The French finance minister admitted that GDP growth forecasts would be reviewed, with the results announced on the 15th March. The French Foreign Minister has also admitted that France is unlikely to meet its budget deficit target of 3.0% - interesting to hear such a comment from a Foreign Minister. Ah ha, another French Minister has popped up to say that France will meet its 3.0% budget deficit target. The reality is that French GDP growth will be anemic (some say negative, but that seems unduly pessimistic at this stage), with the budget deficit almost certainly higher than the 3.0% target; EZ December industrial production came in +0.7% higher M/M (-2.4% Y/Y), much higher than the +0.2% expected and the -0.3% in November; The EU reports that negotiations in respect of a free trade agreement with the US could start in June and that, if implemented, could increase EU growth by +0.5%; The BoE admitted that UK inflation will remain above 2.0% for the next 2 years. In addition, the January inflation rate of +2.7% may well rise to +3.0% later this year. The BoE has not met its inflation target for 4 years and now admits that it won't for a further 2 years. Weaker sterling, together with higher oil prices have forced the BoE to increase its inflation forecast. The governor Mr King also stated that UK growth would be weaker than expected this fiscal year - coming in at +1.7%, rather than the forecast of +2.0% 3 months ago. Sterling got whacked on the news; I have to admit to being totally confused as to intended message of the G7 communique yesterday. I suspect a number of you are equally perplexed. I have tried to read the tea leaves and heres my penny’s worth. The G7 understand that Japan needs to tackle its 15+ year deflation problem and clearly appreciates that will require a combination of monetary and fiscal policy measures. In addition, for geopolitical reasons, the US, the key member of the G7, want a strong Japan. However, the Japanese have been talking openly about Yen levels - that was considered completely out of order. The proposal to buy Yen 50 trn of foreign bonds to weaken the Yen (Mr Iwata’s proposal) was also deemed a foul by other G7 countries and the Japanese were shown the yellow flag - indeed, pretty close to getting the red flag, though the G7 members did not want to risk a major problem, given the current financial crisis. Setting negative short-term interest rates may also result in a red card. So we are down to fiscal stimulus measure and, once the new BoJ governor is in place, major purchases of Japanese assets, including longer term debt. Deposit rates that banks get from depositing funds at the BoJ may also be cut. We await the G20 meeting for further clarification. The confusion suggests that Mr Kuroda is even more likely to become the next BoJ governor - the only problem is that if he is chosen, the Japanese lose him as the head of the Asian Development Bank - important to Japanese politicians/bureaucrats, especially as a Korean may get the role. Overall, it still suggests continuing Yen weakness to little old me + VOLATILITY. However, I’ve cut my Yen short by 50% and may well close totally, as short term, there’s just too much uncertainty - its been a truly fabulous trade, but time to take profits. Even more confusing Yen related comments today - better to wait for the G20 - hopefully there will be some clarification then. Personally, I don't believe that the Japanese will be criticised publically by the major countries; In his State of the Union speech, President Obama stressed the need for an increase in the minimum wage, additional capex expenditure and an US/EU free trade deal. He also pressed Congress to avoid the sequester, due to take effect on 1st March. However, he reiterated the need for revenue increases, by closing tax breaks for companies and individuals, whilst offering few spending cuts. The response by Mr Rubio accused President Obama of being in favour of big government. This, once again, is going to go down to the wire, but unless the Republican’s can gain some momentum for their arguments, the pressure looks like being on them. The public wants to cut the deficit, but also wants their entitlements. The military and the US defense industry are lobbying Republicans hard to reverse the automatic cuts on defense spending - half the proposed cuts. The odds of the sequester coming into effect on 1st March still seems the most likely outcome - however, I must say, recent comments suggest that a rethink may well be on the cards. Interestingly, President Obama issued an executive order which would set voluntary standards for infrastructure companies, in particular, to protect against cyber-attacks; US January retail sales came in at +0.1% M/M, in line with expectations, though well below the revised +0.75 in December. Ex autos, gas and building, retail sales came in +0.1%, as opposed to +0.2% expected. US January import prices rose by +0.6% M/M, lower than the +0.8% expected; Outlook The Nikkei closed lower with the weaker Yen, though it took half a day for it to weaken. European stocks are higher, with US futures indicating a better open. The Yen is all over the place - currently Yen 125.88. The Euro is also pretty volatile - currently US$1.3469, though off its highs. Spot gold is at US$1651, with April Brent at US$117.94 - is it just me concerned about the oil price, which seems to be feeding through into inflation globally. Still believe that the risks outweigh potential rewards. Returns YTD have been great - no point risking them given heightened uncertainty. Will wait for a bit longer before deciding what to do - something which I must admit, I find exceedingly hard to do. Kiron Sarkar 13th February 2013

Was merely illustrative. If it's worth $40 and you sell it at $40 waiting for it to get back down to $20, that's not timing....which was my point.

txitxo appears to have developed an incredible tool for assessing the risk/reward equation of the market by looking at the "junkiness" of the market. Why gum up the model's conclusions worrying about "when" the market will decline? If you've done wonderful analysis on BAC and it's worth $20 but currently sells for $12, why should I care "when" it will reach $20? If BAC is at $20, i.e. fair value, and I sell it b/c I want to buy it back with better upside and a more favorable risk/reward equation, why should I care "when" it declines to a more favorable level?

If BAC traded between $20 and $10 every year for three years, for whatever reason, and you thought it was worth $20.....would it be "timing" if you sold at $20 and bought at $10 every time? I think not..... It is merely valuing and assessing the risk/reward.

WHY IS IT TIMING? ? ? ? ? ? ? Buffett liquidated in 1969/1970 bc he could not find bargains - in other words, the risk/reward was poor - yet the market didn't tank until 1972-1974. Do you honestly think he was timing?

Taking GMO's projections literally, yes absolutely cash and/or bonds are inferior to stocks. However, what their projections don't account for is the highly valuable "optionality" cash provides in a down market. Stating the obvious, even if you lose 2% real per annum over the next three years, one will more than make up for the loss in purchasing power by buying stocks at levels more commensurate with long-run averages. You are assuming that the overvaluation (~30% overvalued) will resolve itself through a relatively quick draw-down in equity prices. However, there are any number possible ways that overvaluation can work itself out that do not result in an opportunity to buy back in: 1) Market trades more or less sideways for about 6 years, then we're pretty much at "fair value." 2) Market goes up 15% in 2013 and then trades sideways from 2014 through 2021, then we're pretty much at fair value. 3) Market goes down 5% during 2013 but you don't buy back in because it's still overvalued, and then it trades sideways for 4 years. 4) Market goes up by 2% per year for 10 years and finishes at roughly fair value. 5) et cetera...you are only limited by your imagination. All that to say that cash has optionality, but the option might finish out of the money. For me, I'm holding securities that I believe are absolutely cheap irrespective of the level at which the S&P500 trades. SJ Correct. Which is why I try to look at the whole picture versus only valuation to better assess the risk/reward opportunity..... As I said in another response, sentiment, sentiment, sentiment. See attached. Investors_Stock_Sentiment.bmp NAAIM_Long_Exposure.bmp Hulbert_NASDAQ_Sentiment.bmp Credit_Suisse_Global_Risk_Appetite.bmp

Taking GMO's projections literally, yes absolutely cash and/or bonds are inferior to stocks. However, what their projections don't account for is the highly valuable "optionality" cash provides in a down market. Stating the obvious, even if you lose 2% real per annum over the next three years, one will more than make up for the loss in purchasing power by buying stocks at levels more commensurate with long-run averages.

All super good points regarding the perils of relying solely upon valuation for gauging market risk. This got me into trouble early last year so I had to learn how to incorporate more factors into my risk analysis..... Sentiment, sentiment, sentiment. Not just the VIX, but a composite look at where market participants are sentiment-wise. You pointed out hedge funds having increased exposure - while in and of itself this is not hugely significant.....if you look at the industry as a whole at market turning points, it is a wonderful gauge of sentiment, at the 2011 bottom, in aggregate HFs were 0% long if not net short....now they are at the highest net long exposure in years..... Margin debt as a percentage of GDP is at levels typically signifying market peaks. And the Citi Economic Surprise Index has now rolled over significantly, which when combined with sentiment etc... is a pretty good risk gauge. This isn't market timing - just risk/reward analysis to see I'd the odds are in your favor. Sanjeev does this precise thing!! He raised cash and bought puts in BAC at the market peak in early 2012 and now he is 40% cash....YET BAC, AIG and MBI are at phenomenal long run levels! As Sanjeev likes to say, this is just as much art as it is science.

I'm not sure if some of (or most of) the dilution is real dilution -- buying other companies with your stock. Sure, diluted share count but the total entity owns more earning assets. Or are you saying executive compensation style dilution matches share repurchases? I meant comp dilution.

Original, I should have caveated that statement with....one can expect a 7.5 to 8.5% return ASSUMING the market does to not compress to fair value. For the 5 to 6% nominal I'm simply assuming dividends will grow at their long term average nominal rate. I imagine GMO assumes the same - for example, Hussman just said this week that his expected returns assume the long run nominal average of 6%. I agree 100% that growth will likely be below average for the foreseeable future, along the lines of 4% as you point out. As far as margin and PE mean reversion, that flows through my "fair value dividend yield" calculation. So if the required return on the market is 9% and you have nominal growth of 6%, then the market is fairly valued at a 3% dividend yield, or 1,250 assuming a 37.50 DVPS. I'm being generous with the dividend.... At the current DVPS of 31, the yield at 1,500 is 2.06%. At a FV DY of 3%, the market is fairly valued at 1,033. So at the current dividend, the 7 year projected nominal return works out to: Change in valuation: .948 X Growth: 1.06 X Yield: 1.0206 = 1.026 - 1 = 2.6% nominal return If you back out GMO's 2.2% inflation projection, the projected real return is .40% per annum. This is slightly higher than GMOs .30% at FYE12, but it is in the ballpark.

Isn't Buffett's mantra, "be fearful when others are greedy, and be greedy when others are fearful"? How can you be greedy if you are already fully invested? And why is holding cash and/or hedging always labeled "timing"? If sentiment and valuations dictate that the risk-reward equation is skewed to the downside, why does being defensive imply trying to "time" when the equation will right-size itself? Valuations and extreme sentiment can continue for a long while, can they not?

So purchasing the market here one could expect to earn 7.5% to 8.5%. 2.5% as income from the dividend and another 5% to 6% as capital gain from the growth in the dividend. Correct. Assuming the SPX is fairly valued at a 9% projected return, FV is 1,250 (37.5/3%). Assuming a 10% FV required return, it is fairly valued somewhere around 940. Either way, there is not a lot of wiggle room up here for the broad indices. And again, if inflation does in fact tick up, I imagine investors will eventually demand anywhere between one and three points of additional yield to compensate for the inflation corporations are not able to pass through.