bmichaud
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Posts posted by bmichaud
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I will give the nod to ECRI here considering they have A) not made one inaccurate forecast in the last 20 years,
Their current forecast is inaccurate.
UCLA-Ceridian pulse of commerce index is down 10% annualized -- symptomatic of a recession if you ask their chief economist:
http://ceridianindex.com/multimedia/video/September-PCI-Falls/
Appears quite coincident to me...... http://ceridianindex.com/
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http://pragcap.com/ecris-achuthan-recession-is-still-on
I look forward to hearing the counter arguments of....1) WEB says "no chance" we'll double dip, 2) Q3 GDP was 2.5%, 3) employment is improving, 4) ISM is still positive, etcetera, etcetera.
Cullen Roche of pragcap even dismisses the double dip call, as he believes it's merely semantics since we never left the balance sheet recession. While I very much admire Roche's work, I will give the nod to ECRI here considering they have A) not made one inaccurate forecast in the last 20 years, B) have accurately called each of the last three recessions (early 90's, early 2000's, and the recent downturn), and most importantly in my mind C) came out and declared we would NOT double dip last year (summer 2010) in the face of widespread negativity and a deeply negative ECRI leading index.
We'll see how well Bernanke and his "printing press" is able to ward off this contagion.
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I'm no fan of Corzine, but had a brief encounter with him once that always left me impressed. It was at the Delta Shuttle at LaGuardia in NYC. For anyone who has ever been there during peak rush hour, they know how crazy it gets there.
This was when he was a senator and running for governor. It was one of those crazy days and I saw him sitting alone at the little food counter they have there. He was eating a sandwich, drinking a beer and reading the newspaper. He was all alone, no entourage. In all my times being on the shuttle, I have seen many people of lesser fame than him with entourages. Most of them also get special treatment and get to board and deplane first (for example, I saw Charles Rangel several times and he always had 3-4 people with him and there would be a commotion as he moved to the front of the line). But when the call came to board, he simply got in line with everyone else. They then moved the huge line so it was pointing in another direction. That caused mass hysteria as everyone was pushing for a better position. I ended up standing next to him in line and we kind of looked at each other and shrugged about all the chaos. I said something about the line and the chaos and he smiled and just said something to the effect that everyone should slow down a little as they will all get seats.
I was impressed at his laid back attitude and the fact that he wasn't looking for special treatment. Of course this has nothing to do with this situation, but just something I always remembered about him.
That's pretty cool actually - I like hearing that type of stuff. Certainly doesn't give the impression of extreme arrogance as the WSJ quote does.
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There is a great quote cited in a WSJ op-ed this morning of John Corzine brushing off a subordinate's concern with MF's European debt exposure:
There are also lessons in Mr. Corzine's particular trading strategy. The Journal reports that he brushed aside at least one warning from a subordinate and bet big on European sovereign debt, particularly bonds issued by Italy and Spain."Europe wouldn't let these countries go down," Mr. Corzine told an MF executive, according to the Journal.
(link: http://online.wsj.com/article/SB10001424052970204528204577010020694373322.html)
This goes to show how utterly dangerous hubris is, especially when battling something as powerful as the markets. Here is Corzine, wealthy beyond all imagination, Goldman Sachs alum, etcetera, etcetera, and could not even drum up enough humility to admit he was DEAD wrong.
This example also demonstrates the folly of relying upon governments (central banks and treasuries combined) to come running to the rescue. IMHO, governments are not in fact bigger than the markets, and as Bernanke's failed QE programs have demonstrated, markets will ultimately revert to their long-run means.
Not trying to drum up a heated debate whatsoever, simply passing along what I found to be a valuable lesson from today's paper.
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In the spirit of halloween, let's all run scared from the ultra-scary USA bond vigilanties costume. My o my what are we to do if China doesn't continue to "fund" our deficits.
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Moore, this whole process is phenomenal, no joke. My posts probably appear far more frustrated than I actually am. Unfortunately a message boards don't convey emotion very well - for example, my leading sentence regarding "stirring the pot" was more of a failed attempt at humor since I knew discussing raising cash and/or hedges on the board would in fact stir the pot since so few agree.
All that to say, the debate has been tremendously beneficial. Hopefully they don't stop!
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Nothing drives me crazier than something I'm saying being twisted to fit one's rebuttal...
I was not at all knocking Paulson's wealth, strategy, success or his ___ size - ALL I SAID was that just bc he is worth XYZ does not automatically give him credibility when he says he thinks the economy is going to recover. He has a wonderful record and my strategy has benefited tremendously from reading and studying what he has done and how he approaches things. Not knocking him personally or professionally whatsoever - again, all I'm saying is that his current net worth does not give him any more credibility for his macro call than even you Moore, dare I say (I'm operating under the assumption Paulson's net worth wipes its a$s with yours).
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"that's not what Buffett did. He stopped buying stocks when there were no values left."
Interesting fun fact burke considering he intentionally allocated between generals, workouts and controls.
Come on guy
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I will never, ever understand the confusion between valuing the market and timing the market. I am making a valuation call, NOT a timing call.
Zero different than not buying a $1 bill for $1 and waiting for it to sell for $.50. NOT timing, VALUING.
As Buffett did in his BPL days, when the market was overvalued, he put a good portion of his capital in controls and workout EVEN THOUGH HE WAS BUYING SANBORN/DEMPSTER/BERKSHIRE AT $.50 ON THE DOLLAR.
I happen to greatly admire his model and believe it's a prudent strategy especially considering the risks in the market.
Again, I'll be 100pc long at fair value, and will get crushed if the market pulls another March 2009. I'm not hedging against the extreme.
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Santyana Misterstockwell and Bmichaud, this is not necessarily a fair argument, but I am willing to bet that the combined line you swing in the market in terms of assets is equal to maybe 1-2% of my personal net worth.
I am sorry I had to resort to this but you have to put things into perspective. I am a professional investor, a fiduciary and a capital allocator that serves clients who demand I allocate their capital and provide exposure to equities.
You guys are waiting to time the market with your small lines, but there is no doubt that even if you buy at the bottom of bottoms on the perfect low of the day of the lowest low the markets print, my nominal performance will be substantially better.
Now we can debate about this all we want, but I have absolutely never met a professional investor with your frame of mind, only small time RRSP style investors with $50-500k to invest, who go to sleep at night thinking they're the next buffets.
I get paid 2 and 20 to deploy capital on a daily and monthly basis.
Take this however you feel, but time will prove I was right. We can check back in a year or two.
You guys waste so much time thinking about capitulation wet dreams because you can afford to, your swinging a small line in the markets and your insignificant, you are retail investors, that most probably clip coupons as well.
Good Night.
Funny how you are associated the size of your wealth cock with your superior abilities....look what happened to John Paulson over this last year, look at Berkowitz. They made a huge call on the US economy and they are down big - they have huge net worths. Get the f$ck over yourself.
How about instead of your net worth you put up some performance numbers over the last 1, 3, 5, and 10 years, as well as performance from peak to trough October 2007 thru March 2009, then subsequent trough to peak March 2009 thru April 2011. Then we'll see what type of markets your strategy lends itself too.
I just saw Alexander Roepers' performance the other day and he was down 64% in 2008 - that is something I am interested in being down in a bear market. IMO, that type of decline is avoidable when the general securities market drops from being overvalued to fair/slightly undervalued. However, if we were to get down to a point where the market is fairly valued, THEN it drops 50% from there, I will be down even more than 50% b/c I will be 100% long if not 125% long in a fairly valued to slightly undervalued environment.
I NEVER SAID there are not bargains to be found in this market. I just am arguing that Buffett provided a good model back in his BPL days for buying stocks selling below liquidation while at the same time worrying about the overall level of the market, hence he put a portion of his portfolio in workouts - go read his BPL letters for the love of God. What I am advocating is no different.
Also - this is no different than any other hedge fund manager managing the net long exposure of his portfolio. You are a 2/20 manager, correct? You would know that HF managers manage the net exposure of their portfolio, I'm guessing.....
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That is my biggest concern with taking the ECRI side - it's a tremendous matchup Buffett versus ECRI, but I give the nod to ECRI (perhaps at my peril) given Buffett missed the last recession and the housing crash.
Buffett didn't dream about holding treasurys over the last two years, yet Prem loaded up on them.
Lots of different opinions and time horizons. Sure, if you buy the market or something cheap and don't look at it for ten years you'll probably do fine. I'd rather hedge and prepare for events to play out in order to take advantage of the time when nobody wants to own stocks.
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Did you see the ECRI video I posted?
Since when does a week of stock market performance indicate economic direction?
Stocks went up 30pc in response to QE2, yet the economy got worse - pure speculation. Now we're bemoaning the QE2 air coming out of the QE2 balloon. If the QE2 rally never happened, we'd still be having this conversation - but since the market has declined from those levels, psychology is such that this is a temporary dip and we'll be right back up there.
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How is me going thru this exercise any different than you and ur firm conducting "research" on whether or not the market is pricing in a recession?
You utilize your fantasy macro monetary view to guide your investment decisions just as much as I integrate my macro view into my general market analysis. Zero difference.
I never once claimed there are not screaming buys right now. Just because the general market isn't pricing in a recession doesn't mean small caps aren't attractive - so it doesn't make sense to say that it's a fantasy for me to believe the market isn't pricing in a recession. You happen to utilize current earnings of the market to justify ur belief the market is cheap - I think that's asinine given the record high NPMs right now.
So if you would like to put 100pc of ur portfolio into small caps that are as low as 2009 as we enter a recession here in the US and Europe grinds itself into depression, more power to you. We'll see who comes out the other side with superior performance. I will be the first one to admit defeat and that I need to change my approach once this all plays out...
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Just to stir the pot a bit, here's why I believe it is a wonderful day to be reducing risk....
I don't know your style well enough, what's the average turnover on your portfolios? (Not looking for a precise answer)
About 3/4 of the portfolio does not change much, as its made up of long-term (if not permanent) holdings and special situations that will be held for more than a year. The remaining 25% has higher turnover consisting of opportunistic short-term trading opportunities (not intentionally short-term, but rather securities that would not lend themselves to a permanent status in the portfolio that will be sold if they move up 25% or more), workouts, and cash. The short side of the portfolio has high turnover as it is done opportunistically (as in today) after larger moves in the market and/or individual securities I utilize to hedge. I use a very rudimentary formula for managing general market exposure - so right now my calculated expected 10-year CAGR for the market is 5.84% and my general exposure is around 55%. If for example the market moved up to where it was priced to return 3% per annum, I'd bring the exposure down to around 30%.
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Stocks are are oversold and are totally pricing in a recession – SPTSX is 51% priced in for a typical recession, Energy stocks are still 139% priced in for a recession, and Financials are 67% priced in. Stocks are cheap.
Recessions 1929-2008* 2008-2009 Credit Crisis** Current Market** % Priced In**
NAME % change peak to trough % change from 2008 peak to 2009 trough % change from 2011 high of a Credit Crisis Typical Recession
S&P 500 INDEX -25% -53% -18% 33% 70%
S&P 500 INFO TECH INDEX -38% -50% -13% 25% 34%
S&P 500 FINANCIALS INDEX -28% -79% -30% 37% 106%
S&P 500 HEALTH CARE IDX -18% -40% -14% 36% 81%
S&P 500 ENERGY INDEX -26% -50% -26% 52% 101%
S&P 500 CONS STAPLES IDX -20% -34% -9% 26% 44%
S&P 500 CONS DISCRET IDX -31% -52% -16% 31% 52%
S&P 500 INDUSTRIALS IDX -27% -62% -25% 40% 92%
S&P 500 UTILITIES INDEX -22% -49% -5% 10% 21%
S&P 500 MATERIALS INDEX -26% -59% -27% 46% 103%
S&P 500 TELECOM SERV IDX -22% -47% -12% 25% 53%
S&P/TSX COMPOSITE INDEX -32% -46% -22% 47% 68%
S&P/TSX FINANCIALS INDEX -22% -55% -18% 32% 81%
S&P/TSX ENERGY INDEX -16% -48% -30% 63% 190%
S&P/TSX MATERIALS INDEX -21% -43% -23% 54% 111%
S&P/TSX INDUSTRIALS IDX -31% -46% -21% 46% 69%
S&P/TSX TELECOM SERV IDX -28% -38% -5% 13% 17%
S&P/TSX CONS DISCRET IDX -31% -49% -18% 36% 57%
S&P/TSX CONS STAPLES IDX -12% -16% -7% 44% 58%
S&P/TSX UTILITIES INDEX -5% -34% -5% 15% 106%
S&P/TSX INFO TECH INDEX -54% -59% -44% 75% 81%
S&P/TSX HEALTH CARE IDX -25% -36% -28% 79% 113%
Perhaps I am too rigid in my valuation techniques, but when you look at a range of normalized valuation metrics, the market as a whole is overvalued here. To simplify things and lend credibility to my claim that the general market is overvalued, I lean on Grantham to provide an exact FV for the S&P 500, which he recently said is no more than 950 (see here: http://www.investmentpostcards.com/2011/08/16/jeremy-grantham-sp-worth-no-more-than-950/).
So under the assumption that at fair value said asset is priced to deliver its cost of capital, we can back out the implied growth rate of the S&P 500 at 950 assuming a 9% cost of equity (the long-run nominal return for the market - see attached) and a $25.18 per share dividend for the index. At 950, the dividend yield would be 2.65% (25.18/950) and the implied GR would be 6.35% (or a little lower b/c technically the forward dividend should be used).
Currently with the market at 1231, the expected 10-year CATR (compounded annual total return) is 5.84%: 2.05% yield + 6.35% GR + -2.56% annual decline to fair value [(950/1231)^(1/10)-1].
As you can see in the Schiller Data attached, over the last 10, 20, 30, 40, 50 and 60 years, Actual EPS grew 8.6, 7.6, 5.9, 7.1, 6.9 and 5.9%, respectively, while Actual Dividends grew 4.8, 3.7, 4.6, 5.4, 5.2 and 4.8%, respectively. Reported earnings have been very robust over the past ten years, yet cash actually making its way into shareholders' pockets (i.e. dividends) has grown anemically in comparison. I would posit that the level of EPS growth relative to per share dividend growth was primarily due to elevated profit margins as a result of A) cheap leverage, B) elevated financial sector leverage, thus elevated financial sector EPS contribution, and C) record high O&G profits not reflecting actual cash making its way into O&G investors' pockets due to D&A vastly understating the true cost of maintaining an O&G business (i.e. it costs XOM FAR more to maintain its production than its $15.8B LTM D&A, which includes its R&M/Chemical segments).
All that to say....dividends have grown around 5% over the last 10 years, yet Grantham's 950 FV is assuming growth of a little more than 6% - we just came off of a 10-year period of tremendous leverage, and are most likely going to go through a 10-year period (about three years in now - 2009, 2010, 2011 - so 7 left) of tremendous DE-leveraging, thus I believe it is logical to conclude growth is going to most likely be below-average on a go-forward basis. So assuming below-average growth, IMO the market should be trading at a level that implies below-average growth, versus where it is trading at now, which, by definition, is implying ABOVE-average growth going forward. If the market was in fact fairly valued at 1231, then the implied growth would be around 6.9% [9% cost of equity minus (25.18/1231)]. I just don't buy that dividends are going to grow 6.9% per annum over the next 10 years.
So I'm not sure how that fits in with what the market is implying based on how far it has fallen relative to past bear markets, but that is how I am looking at general market risk at the moment.
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Completely disagree, as always it seems.
Equities have been setting higher lows, since August.
It appears you missed the bottom!
Ahh Moore, I knew you'd be good for a rebuttal or two on this topic.
IMO, the market has not even come close to discounting A) a US recession as the ECRI has predicted, or B) a Eurozone grinding itself into oblivion via forced austerity measures, LET ALONE both at the same exact time (I won't even bother putting a Chinese slowdown as the third simultaneous risk not being discounted).
Like I said, there is room for individual 50-cent dollars as well as market hedges in the form of cash, market-neutral special situations, or index shorts.
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Just to stir the pot a bit, here's why I believe it is a wonderful day to be reducing risk....
1. http://www.businesscycle.com/# (see video on front page)
2. http://www.hussman.net/wmc/wmc111017.htm (see paragraph 3 in its entirety as well as list of Euro banks' leverage ratios)
3. http://pragcap.com/the-two-biggest-risks-in-europe
4. http://pragcap.com/those-darn-italian-bond-yields
My guess is that a downgrade of France's RIDICULOUS AAA rating is only a matter of weeks away if not days, which could be the trigger to a nasty domino effect.
Not at all saying to go to 100% cash as Hussman currently is - just trying to reiterate the dangers out there very much still lurking that are currently being hidden in plain site by the rallying stock market. There are plenty of individual opportunities out there, which I believe should be taken advantage of...but as Buffett demonstrated back in his BPL days, there is nothing wrong with pairing 50-cent dollar bills with cash and/or market-neutral special situations!
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This thread started out as an offline discussion with BenGraham.
In the exchange, I mentioned that I took Warren's suggestion to "invest as though you're working from a 20 punch card" very seriously
Of course, hardly anyone does this.
In itself, that's interesting. The greatest investor in history tells the world, over and over, that the secret to success is 20 punches, and the world ignores him. Absolutely ignores him. Even his most ardent supporters ignore that part of the catechism.
If your approach is based on 20 punches, then you'll naturally look for ideas that have the potential for quite a bit of growth, thus the thread on 10 baggers.
It appears that some of the more indignant posters are unfamiliar with the charms of 10, 20, 30 and 100 baggers.
My guess is that most investors on this board enjoy the process of managing money either professionally or individually. If this is in fact the case (as it is with myself), then we can agree that the essence of what makes managing money so rewarding is the challenge of not only finding attractive securities but also fighting natural human emotion associated with investing (Buffett is 80 years old and still quotes Ben Graham's axioms for fighting Mr. Market). I find Buffett's "20-punch card" a very unfulfilling way to invest if one finds the process to be the most rewarding part of the investment process. I don't need to own 50 companies BY ANY MEANS in order to have my competitive desire to find undervalued securities fulfilled, but sitting back and finding ONE new idea every two or three years throughout a 50-year investment lifetime, at least in my opinion, sounds very unrewarding. And of course this assumes what you are investing in is in fact that elusive 10-bagger.
Perhaps others here have the confidence in themselves to put their entire net worth in a single entity that will return 10 times their money over ten years for a 26% CAGR - I certaintly do not....I would rather try to put together a portfolio of 10 to 15 securities/special situations that will compound at 20 to 30% per annum, much like our beloved Warren Buffett did back in his BPL days.
If Buffett truly stuck to his 20-punch card theme, he would not trade in and out of his personal portfolio, and he would put BRK's entire equity portfolio into Coke, WFC, and WMT.
LVLT may in fact return 10 times from here over the next ten years - and while I love the enthusiasm surrounding the potential for all digital content ever created in the world to be streamed over LVLT's "fat pipes", I would posit that LVLT would not, UNDER ANY CIRCUMSTANCES, comprise the entire portfolio for any of the Super Investors mentioned on this thread that currently hold it.
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Hahahahah the reactions to this thread are hilarious. You guys obviously don't spend enough time on the LVLT thread ;) That's what this entire thread is about!!
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I'm sure most have seen, but thought I'd pass along. Great stuff this conference....
http://www.marketfolly.com/2011/10/value-investing-congress-slideshow.html
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Buffett says that if value investing, i.e. buying a $1 bill for 50 cents, doesn't click in thirty seconds then it never will.
There's a reason the gold standard does not "click"...
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Woodstove & AZ,
Make sure to take the pragcap site with a bucket of salt b/c it is just a blog ;D
Good article here: http://pragcap.com/art-cashin-tells-very-scary-stories
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Not at all talking about stock mkt booms and busts, I'm talking purely economic booms and busts.
And FYI, my capital is stored in high quality businesses that will grow my real net worth through any environment over time. Not cash.
ECRI Recession Call Remains Firmly Intact
in General Discussion
Posted
UNP was trading around below $60 in January 2008 when ECRI came out and said a "self-reinforcing downturn has already begun" (see: http://www.businesscycle.com/aboutecri/trackrecord). UNP then proceeded to climb above $80 per share in August 2008....