bmichaud

Yes, yes another thread "won" by the great Burke. Congrats 8)

I was referring to shorting with regard to BB. It's a portfolio management decision. Greenblatt's strategy of bottoms-up stock picking got CRUSHED in the downturn. Pabrai got CRUSHED in the downturn utilizing "bottoms-up" without hedging. I'm not on a limb here worrying about market risk.

Most investors can hedge via holdings bonds or cash versus stocks. Not that complicated. Basic portfolio management. Overweight bonds/cash when the market is high, overweight stocks when the market is low.

really did Paulson hedge last year? Did BB hedge last year? Why don't you tell people how much it cost the Shiller disciple in "lost wealth" as they hedged out market risk the last 20 years? what you fail to tell people is that if you hedge out market risk it can COST you, in frictional costs and performance. There is cost to being an academic, not to mention they almost blew up the global economy and had to have j6p (who did not go to Wharton) bail them out. Again, diverting. Dan Loeb hedged. David Einhorn hedged. BB CAN'T HEDGE. Baupost is not fully invested. Howard Marks is not fully invested. Of course there is risk to hedging - there's also risk to being 100% long. The trick is to know when to hold 'em, and when to fold 'em. Buffett knew to fold 'em in the late 1960's - my guess is there were many investors worried about missing the next upleg in the market when WEB was getting out. Grantham lost a ton of business in the late 1990's by turning bearish years before the market top. Pretty sure we all know how that has turned out for him.

hahah classic - diverting the conversation. I'm for hedging and you are against it, simple as that. All I am doing (and have done) is point out that very prominent investors hedge in some way shape or form. None of them completely ignore risk as you would like to lead everyone to believe.

Hedging has everything to do with it. If your company doesn't get taken out, then you've hedged the risk of the stock declining in value along with the general market. You know, there is an entire industry predicated on the concept of hedging.... Michael Price invests in special situations as well as general undervalued situations because the special situations are uncorrelated with the market (see: http://www.dailymarkets.com/stock/2010/05/05/michael-price-resource-page-complete/). Why would he invest in something that is uncorrelated with the market if he doesn't at all care about the market? Here are Walter Schloss's investment guidelines (take note of #9) (link here: http://www.gurufocus.com/news/138200/walter-schloss-the-essence-of-value-investing): Factors needed to make money in the stock market: •1 - Price is the most important factor to use in relation to value. •2 - Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper. •3 - Use the book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock). •4 - Have patience. Stocks don’t go up immediately. •5 - Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news. •6 - Don’t be afraid to be a loner but be sure you are correct in your judgement. You can’t be 100% certain but try to look for weaknesses in your thinking. Buy on a scale and sell on a scale up. •7 - Have the courage of your convictions once you have made a decision. •8 - Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful. •9 - Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you can sell but often because a stock a goes up say 50%, people say sell it and button up your profit. Before selling try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E ratios high? Is the stock market historically high? Are people very optimistic etc? •10 - When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. Three years before the stock sold at 20 which shows there is some vulnerability to it. •11 - Try to buy assets at a discount [rather] than to buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings. •12 - Listen to suggestions from people you respect. This does not mean you have to accept them. Remember it’s your money and generally it is harder to keep money than to make it. Once you lose a lot of money it is hard to make it back. •13 - Try not to let your emotions affect your judgement. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks. •14 - Remember the work of compounding. For example, if you can make 12% a year and reinvest the money back you will double your money in six years, taxes excluded. Remember the rule of 72. Your rate of return [divided] into 72 will tell you the number of years to double your money. •15 - Prefer stocks over bonds. Bonds will limit your gains and inflation will limit your purchasing power. •16 - Be careful of leverage. It can go against you.

Burke doesn't understand the concept of hedging, thus he would not understand the concept of hedging out the market risk embedded in an investment program centered on purchasing publicly-traded equities. Those buying a whole businesses have the luxury of being able to ignore market risk because the ROI is generated via taking cash out of the business - inversely, those buying whole businesses do not have the luxury of the marketplace re-rating their investment. Private buyers, private equity and activists have an embedded hedge in their operations due to the control they are able to exert on the investment, thus their operations are not directly comparable to those on this board who no doubt do not have a controlling position in their holdings.

It is a perpetual money machine. The US/UK/Japan have an enormous responsibility to not abuse their respective positions as monopoly currency suppliers and flood the world with their currencies (currencies meaning actual hard currency as well as treasury bonds - both are in effect the same thing in this system). The limitation is inflation, and this is regulated by taxation, since taxation is the only means for removing currency from the system. Unless the US/UK/Japan borrow in a foreign currency, then there is no such thing as "getting funds from abroad". Think about it - when Chinese companies sell US consumers their goods, we pay them in USD. The Chinese companies convert those USD into Yuan, which inherently drives up demand for Yuan and strengthens the currency. In order to offset this demand, the Chinese government prints Yuan in order to buy the USD from Chinese companies - this weakens the Yuan while simultaneously creating demand for USD as the Chinese government buys USD. So at the end of this cycle, the Chinese government is sitting on a huge pile of USD - they can either hold the USD in a bank account earning 0%, or they can buy Treasury bonds yielding .25% to 3% depending on the maturity. China must FIRST obtain USD before investing in US Treasury bonds. It only makes sense - they can't purchase US denominated assets, including US Treasury bonds, before FIRST obtaining USD. The process is the same for Japan and the UK - Yen and Pounds are first spent into existence, then Yen bonds and Pound bonds are issued. So once the currency is in the banking system, the central bank/central treasury can simply swap bonds for currency via the central banking system. Who purchases the bonds is irrelevant as demonstrated by the US Treasury market not skipping a beat when the Fed left the market. It's the complete opposite for Germany/France/Italy - if those countries have zero Euros in their coffers, then they must first tax their citizens or issue Euro bonds to Euro currency holders seeking an interest-bearing asset in order to spend. They cannot spend first because they cannot print Euros - only the ECB can print. The ECB could initiate a massive EUR1 trillion infrastructure project if they so desired, and simply pay all the contractors and private sector construction workers by crediting their bank account with the one-trillion Euros. The EUR1 trillion would be spent/printed into existence. This hypothetical infrastructure project would be inflationary in a normal environment if the ECB did not simultaneously tax perhaps EUR750 billion out of the system, in effect, running a EUR250 billion deficit. This example is the precise mechanical outline of a monetary system operated by a monopoly currency supplier such as the US/UK/Japan. We can only hope Europe will adopt this system, and finally put the finishing touches on what is inevitably a United States of Europe. If they don't, they risk a break-up and....

Who buys the bonds is irrelevant for a monopoly currency supplier - bond issuance is simply a tool to soak up reserves in the banking system. So the Japanese central bank/central government swaps Yen bonds for Yen currency within the banking system. But again, bond issuance is irrelevant for spending - the Japanese government spends first, injecting Yen into the private sector, then it issues bonds, swapping them for the newly created reserves created via spending. So the Japanese citizens wouldn't have to buy a single bond from hereon out and the government would be fine. Just look at what happened when the Fed stopped QE2 - the Fed stopped "funding" government bond issuance, and the Treasury market never skipped a beat. China could discontinue purchasing USTs for the rest of time and nothing would happen - they can choose to hold the USD they accumulate from running a current account surplus in a bank account yielding nothing, or they can invest their USD in Treasury bonds. European governments are at the mercy of the market because they gave up their right to print money, as Buffett likes to say. The European countries are like the US states over here - they cannot print money, thus they must first tax or issue debt before spending. Europe is missing a central treasury that would work in tandem with the ECB, spending/printing newly created Euros, and issuing Euro treasury bonds to soak up the reserves. A centralized treasury/central bank would be able to balance out the trade imbalances within the Eurozone as well as run deficits in order to offset the austerity measures being implemented across the Euro "states".

There won't be a crisis as long as Japan is a monopoly supplier of its own currency. The US, UK and Japanese governments spend first, tax second, and issue bonds third - they are in complete control of their currency as long as their economy remains productive. In the event the economy collapses, then the currency would be rejected and hyperinflation would result. Europe is effectively on the gold standard because it must first issue bonds to the market or tax its citizens PRIOR to spending - thus Europe is a ward of the markets, as evidenced by the current crisis and spiraling interest rates. Super important distinction - currency ISSUERS spend first, tax and issue bonds second, while currency USERS must tax and issue first prior to spending. Thus bonds of currency ISSUERS are 100% free of capital return risk, whereas the bonds of currency users are not. As households, we are like Europe - we can't pay our credit card without dollars in hand. If we could create dollars, then we could always pay our credit card. The primary responsibility of a currency issuer is to not induce hyperinflation via persistent, unproductive spending. We shall see how long it will take for US, UK and Japanese citizens to reject their respective currencies. My bet is those currencies won't be rejected any time soon if ever. I'll take the other side of a bet against a currency issuer any day of the week. How does this viewpoint help us as investors? It keeps us out of unproductive, unprofitable hedges against US hyperinflation, or bets against currency issuers; it keeps us from rooting against the current deficit spending that is just barely keeping the US private sector afloat and able to spend money on the products our companies produce that in turn provide a return our investment; and it makes us aware of the truly hideous combination of a debt spiral and forced austerity measures being implemented over in Europe and the impact that will have on the global economy and financial system.

Very neat perspective on the falsehood of Japan's "lost decade". http://www.nytimes.com/2012/01/08/opinion/sunday/the-true-story-of-japans-economic-success.html?ref=opinion

http://www.businesscycle.com/news_events/news_details/3112 hmmmmm, a warm and fuzzy -8.2% growth rate.

Up 7.5% net of hypothetical 1%/20% fees with a 6% hurdle. Averaged 60% net exposure for the year with top 80% of holdings averaging $40B in market cap (average market cap cited in order to make "adjusting for size" easier for those who care). Net exposure on a "beta basis" much lower than 60%. Benchmark is the Dow Jones Total Return index, DWCFT, which was up 1.03% for the year.

Dexia

Interesting chart on page seven here: https://www.wellsfargo.com/downloads/pdf/com/research/market_strategy/2012-Economic-Outlook_12072011.pdf Shows median home size versus average household size.

I agree. Note that we're agreeing on a completely obvious thing, which is a good start :D It's not that simple? Oh yes it is. I own my own house and I have it filled with furniture and pay the heating bill. So does my neighbor (has it filled), except that he is renting the house. Both houses are the same size. Their house is every bit as full of furniture as mine. Don't you reckon the houses across America going into foreclosure are being bought by investors (if not owner-occupiers) who wish to rent them out? I presume that's what they intend to do with them. If not, then what? Those households who make up the excess home ownership rate, I don't think the majority are renting out homes. Perhaps they are....

IMO there is a big economic difference between living in a house and renting an apartment. It's not as simple as a household either rents or owns a house. The "stuff" required to fill a house is much greater, as is the energy required to run a house, for example. Yes more apartments need to be built, but even that is not the economic equivalent to building a like number of houses to house the households seeking shelter. In theory, three households could live in a 3000sf multi-family unit broken down into three apartment units. So if home ownership rates fall to 63%, that's 3% generating less than normal economic housing activity. Let's not forget either that the government is running 10% deficits right now. Thats a massive boost to the economy. Think about where we'd be if we'd have run 5% deficits for the past three years let alone a balanced budget. even if housing gets back to normal, contractionary fiscal policy will be working hard to offset that.

Perhaps we are in a deficit, but you could also say home ownership rates are just now getting back to historical norms (66% now versus 69% at the peak). If formations get back to a normalized rate, then a near term bottom would make sense. The cynic in me says markets overshoot both on the upside and downside, and given the hideous nature of deleveraging environments, perhaps household ownership rates overshoot down to let's say 63%. If I was investing in ownership rates, I'd say we're at fair value.

Where did you pull the number 1350 from? The average from 1990 to 2000.

From 2001 through 2007, completions averaged 1736. Based on historical numbers, let's call the long run average is 1500 per year. So we over built by 236 per year for seven years, for total overbuild of 1653. From 2008 through 2011e, we built 3166 in total, or 792 per year. For those four years we've underbuilt by 2832 cumulatively, which would indicate we've more than made up for the excess 1653. If we assume the long run average is 1350 per year, we overbuilt by 2702 over those seven years, and have under built by 2232 over the past four years. Assuming the second scenario, we are not quite there yet. More just thinking out loud for my own sake. Household formations and a more normal level of home ownership will affect all of this, obviously.

"The return to a "normal" housing market, where supply and demand are in balance and prices are rising 2 percent to 3 percent a year, is still, unfortunately, years away." So I guess despite a housing price bottom in 2012, there is no V-shape coming out of it. I'd be curious to hear how this would fit into WEB's housing recovery thesis. I think I last saw him say he thinks inventory is being worked through at a faster rate than the market currently is estimating.

Another good WF housing note. WhatsBehindtheUpwardTrendinHousing_12202011.pdf

http://www.cnbc.com/id/45748250 Well it now appears the entire European banking system is on ECB support. Sovereign bond holders are enjoying the warm fuzzy blanket of hope that institutions leveraged 40 to 1 will bail them out by sending the: Italian 10 year yield up 3.41% Italian 2 year yield up 5.57% Spanish 10 year yield up 3.88% Spanish 2 year yield up 6.5% Let's continue to fight debt with debt and impose harsh austerity in the middle of a recession. Beautiful.

so now the ECRI forecast is "dependent" on an exogenous shock. A real hail mary! hahaha precisely what I was implying. Was trying to avoid the R-word since discussing the possibility/likelihood we're headed into a recession is a big no-no on here. But since you brought it up.... http://www.businesscycle.com/news_events/news_details/3108 http://www.hussman.net/wmc/wmc111219.htm http://www.telegraph.co.uk/finance/china-business/8957289/Chinas-epic-hangover-begins.html Will be interesting to see how bank balance sheets/stock prices perform through a global recession. Perhaps that scenario is baked into current prices, but I'm not smart enough to figure out how a capital position wiped out by a mere 10% hit to the asset side can withstand that scenario.

I found this attachment deep in the bowels of ZH ;D Looks like some unseasonably warm weather may have had something to do with pulling some construction forward, but otherwise very slow, steady improvement. Evidence of a slow recovery unable to withstand an exogenous shock.... WF_Housing_Starts.pdf