bmichaud
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Posts posted by bmichaud
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Stanley, it's a great observation. I can post later, but preceding every depression (or a good number)in the USA going back to the 1800s, guess what the govt ran...surplus. Guess what preceded the most recebt decade of outrageous profligacy in the private sector? The Clinton surplus/"resposnible" govt years.
But yes, let's go back to the gold standard. My life here in the USA blows - my standard of living is deteriorating before my eyes.
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I only have access to my phone, so this will be brief...
Moore, you're implying that whoever holds USTs is "funding" the USA. Under our monetary system, it is metaphysically impossible for another country to "fund" the USA - that's not naïve or ignorant, it's operational fact. It's a dangerous practice for someone as bright as yourself to tell people that the USA is funded or has creditors - this will lead people to believe that we are at risk of becoming Greece. Again, metaphysically impossible since the USA has to first spend dollars into existence for others to buy US treasury bonds.
It sounds like you're venturing down the path of hyper inflation/Ron Paul fear mongering...what is so bad about our current system with regard to inflation? It's averaged 3.5pc over time - I don't see why that's bad. If you read Dalio, when we allow for horizontal credit creation, there will be debt super cycles - the gold standard only exacerbates this bc there would be no effective central treasury to make transfers, precisely the problem Europe is facing. Europe is on the gold standard - has that kept them from profligate borrowing? Heck no - let's take a poll to see if the board would rather be America or Europe right now.
And you indicate you want the US to reduce its trade decit...I'm guessing you realize that for every net export nation there must be a net deficit nation. So if all governments were on the gold standard and ran a balanced budget, net import nations would drive the private sector into the ground due to the following unfallible accoutning identity:
Private sector savings = public sector deficit + net exports.
Under a balanced budget, a net import nation would be sucking dollars out of private sector hands on an annual basis.
A fiat money system with fully convertible currency systems where governments don't outspend their productive capacity is the most appropriate system for a dynamic global economy where there are net export and thus net import nations, in order to allow exchange rates and capital flows to adjust naturally.
Like it or not, we'd get out of this debt bubble mess if we had fewer gold standard proponents and more proponents of running the US government according to the accounting identity cited above. For the love of God the UST market is BEGGING the govt to run huge deficits "financed" with sub-3% 30 year "debt". It's ridiculous. We're trying to cut deficits, i.e. reduce the current build up of private sector savings, while at the same time the private sector is paying down debt.
Yes we need more effective govt spending policies, flatter tax rates, social security reform, medicaid/medicare reform, and less market manipulation by the Fed - but our system works, and our system is begging us to spend more dollars into existence.
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I have significant skin in the game as i manage money. Believe it or not I'm 70pc net long at the moment.
My beliefs on the monetary system and fiscal policy used to be very similar to yours, but the work of Cullen Roche over at pragcap.com has changed my beliefs for the better, as his work outlines not economic theory but economic reality. I'm a math guy, and 2+2 makes sense to me. China "funding" a country that issues "debt" in its own currency doesn't add up to me.
I don't think the world is coming to an end at all, or else I'd be in 100pc cash. I think the deleveraging nature of the post-global-debt-bubble has created an environment where value investors should take care to protect against Prem's "second leg down" scenario.
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Great post. Let's hope this kind of thinking continues so that we can continue to take depressed individual American equities off of their hands ;D
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Correct me if I'm wrong, but weren't we on the gold standard in 1929?
That didn't work out all that well.
According to Jim Grant the Great Depression was actually healthy for the economy b/c it deflated away all the excess....
Let's ask Japan how that's working out for them. Or perhaps the Europeans in three years after they "cut" their way to prosperity over the next three years.
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With a gold standard system that would never happen. There would be no questions about counterparty risks or ability to repay.and we would keep a fractional reserve banking system to allow the economy to expand and contract based on the forces of capitalism. The key difference is that the government would no longer be able to subsidize their deficits, leading to a much healthier economy, and the same would be true for market participants, would be able to sleep at night knowing their US Dollars were convertible into gold.
Where I am in fact naive is with regards to the gold standard. So under a $35/ounce of gold system, there by definition could only be 35 USDs in existence for every ounce of gold at the Fed, correct? So under that scenario, the Fed cannot print money and the Federal government must run a balanced budget.
Ok so even if that is the case, with a fractional reserve banking system, the banks can create an unlimited number of deposits in the system constrained only by capital requirements. So within the horizontal banking system, there would still be large debt super cycles and deflationary busts, as the private sector rushes for the monetary exits to sell down assets in order to pay down debt.
With a fractional reserve banking system, there could still be a "run on the bank" because lending creates deposits in excess of the actual money supply available to pay back depositers.
All that to say - how would there be "no questions about counterparty risks or ability to repay"? Who is the counterparty that would always be able to pay under the gold standard?
For your gold standard society to actually work, there would have to be zero horizontal credit creation so that all economic growth would be via productivity. I would attach the document if I had it, but someone posted a paper by Ray Dalio that outlines this whole issue.
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Carvel, unfortunately I do not feel like engaging in a long debate on this matter on this Sunday. I will just say that a hard money system is the optimal system for unleashing the powers of capitalism. A fiat system punishes the savers and rewards the debtors, encourages lower classes of society to assume debt, and leads to significant booms and busts.
In a gold-standard system whatever progress society makes is permanent. Money retains its value. Deflationary issues are not bad, they are good and are part of the natural cycle of capitalism. A fiat system attempts to force trust on the participants in the market place. We have now learned that this trust can disappear without warning and results in widespread fear.
With a gold standard system that would never happen. There would be no questions about counterparty risks or ability to repay.
This was a very light version of my thoughts, if you go through some of my historical posts you will see more about this. Keep in mind, if we had a gold-standard system where Base money was supported by a ratio of gold IE: 35 to 1 or what not, Central Bankers would still have the same tools IE: Interest Rates, and we would keep a fractional reserve banking system to allow the economy to expand and contract based on the forces of capitalism. The key difference is that the government would no longer be able to subsidize their deficits, leading to a much healthier economy, and the same would be true for market participants, would be able to sleep at night knowing their US Dollars were convertible into gold.
In this system the lower classes would have a harder time to succeed, they would have to work a lot harder. But the good news is that any advancement in prosperity would be near permanent and sustainable. I tell people that on a gold standard system human prosperity escalates a stairwell as opposed to a slope. With each prosperous period we take a new step forward, its sustainable, its permanent. With fiat money we are always on a slope, one mistake and we can slide down to where we were 10-20 years ago.
I see comments on this board that just strike me as incredibly naive. Bmichaud for example (sorry man we seem to butt heads) with his analysis of why China is not a creditor to the US, going out of his way to convince himself that we are doing them a favor. Come on...
We would all be much better off if we reduced the debt in the system and had a medium of exchange that would retain its purchasing power over time. The economy might contract for a few years but the growth would be geniune and sustainable.
Obviously we can disagree whether or not a gold standard is appropriate, but come on....how can you read the links that I posted, think through it, and still believe that China is a creditor to the USA? Do you honestly believe that China must first gives us the dollar bills required to buy their goods? If so, how did those dollars that China is "lending" us first come to exist? By definition we had to spend/print them into existence.
I went a long while fighting this reality, and would be willing to go back to believing China "funds" our spending if it was in fact explained to me....
Seriously, please explain.
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Bmichaud, who cares about the UST's right now, what if China and Russia engage in trade utilizing gold as a medium of exchange? What if China buys its iron ore in gold from Australia.
The US is only 25%~ of world GDP.
Try to understand, this is very serious and even more due to the obvious fact that these policies are being pushed from the top of the chinese politicial system.
The chinese would like to control their commodity prices so they can shift from an export nation to one which is supported by internal consumption. They view gold as the ultimate currency and it matters little what you or americans think. If chinese use gold as a medium of exchange it will not be good for America or any other nation with fiat currencies.
Only the creditor nations can afford to make this switch, the debtor nations are screwed if the rest of the world moves on to hard money. This will be a game changer.
The only way for China, and the world for that matter, to discontinue accumulating USDs, is to stop exporting to the USA. Is that really going to happen so that said countries reduce their "reliance" upon the USD? What economy is going to buy all of China's products? Europe? Japan? If so, Europe and Japan would have to begin issuing more currency in order to buy Chinese products, i.e. run higher deficits - so China would then be holding other trade deficit currencies at risk of "inflating". Or the entire world ex. the USA would have to move to the gold standard.
In order for China to even think about moving in the direction of reserve currency, it would have to open its economy, and loosen currency and capital controls. I don't see that happening.
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http://cnbusinessnews.com/china-to-install-more-than-2000-gold-atms/
This is the kind of stuff we all need to be worried about. If the creditor nations begin to use gold as a medium of exchange...
China is not a creditor to the United States of America. The only possible way for China to purchase USTs is to obtain USDs via its trade relationship with the USA - the only possible way for those USDs to be made available to China is for us to first spend/print them into existence. If the USA was starting from zero, it would be metaphysically impossible for China to "lend" to us b/c there would be zero USDs in existence.
http://pragcap.com/china-divests-97-of-treasury-bill-holdings-what-does-it-mean
http://pragcap.com/bernanke-still-doesnt-get-it
http://pragcap.com/america-cannot-go-the-way-of-greece
http://pragcap.com/mmt-as-an-alternative-to-austerity
http://pragcap.com/whoa-thats-a-lot-of-private-sector-savings-i-mean-debt
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I love Ackman, and his track record is fantastic.
Other than the Target fund that went under! ;D Cheers!
I think that interview was the first time Ackman really detailed his real estate thesis on Target. He said at the time they thought a REIT solution was worth $40 per share!!! That is unbelievable. I had no idea he thought the real estate was worth that much - no wonder he had the conviction that he did and was able to raise the money he did. I am SHOCKED the BOD didn't look at that (assuming he gave them an approximation of what he thought the REIT was worth to shareholders) and immediately jump at the idea.
Further, I love his singular thinking on American corporate boards - EMBARRASSING. hahaha
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Take AAPL computer makers have had 30 years to come at AAPL their margins in that space are growing while every one else is facing declining margins. I bought AAPL for the ist time in 2002 because I realized the consumers for their products were rapid devotees. You could not get a MAC user to buy a PC well the cult has grown and now with Steves passing he is already taking on mythic popularity. Its becomming a religion. I aint worried about competition for a few years.Those of you who are worried about the profit margins collapsing. Your reasoning is something along the lines where capitalism will fail in theory if these margins hold up -- thus competition will move in for sure.
Well, lets say a company makes a widget where he's got these huge margins. And given that the entire market taken as a whole trades at these fat margins, you are worried about competition springing up anywhere and everywhere, essentially.
Just remember. In order for a competitor to spring up, then people need to be hired to create this duplicate competing product, and factories need to be built. Offices need to be occupied. But you are worried about the margin for the entire market coming down, so this is going to be the mother of all economic expansions.
I do not think that is the only way for margins to collapse. I can think of two examples
1. Take PG. Many of its brand products sell at a premium price to more generic ones. If consumers are feeling poor, they can switch to non premium brands and margins would collapse at PG. This can occur at any company - actually more likely at other companies that do not have moats like PG.
2. Take Apple. Profit margins of iPhone, iPad etc are going to come down as rivals just catch up just enough in quality to erode margins. At some point say iPhone 12, the androids and windows phones of the world are going to be pretty close to iPhone to reduce the premium Apple was able to charge.
No huge spending boom needed for either case.
Vinod
There is some great commentary on AAPL on another thread, so I am only reiterating what was previously said, but....
The sentence I bolded is an EXTREMELY dangerous way to invest - the terminal value of a company is such a huge, huge portion of intrinsic value that it is absolutely imperative to have a view of what a company is going to look like in ten, 20 and 30 years. Just b/c one doesn't intend to hold something for ten years like Buffett, one must, if investing intelligently, be able to predict within reason what a company will look like in ten years. If Apple grows at 100% a year for ten years, then goes out of business, the stock will be toast (obviously that's extreme, but...).
Even if consumers are in love with their products, in the long run, they have ZERO pricing power. Look at what prices are doing on their legacy products. In order to continue their financial performance, they have to continue coming up wtih products that are continuously at the top of their respective product categories, to the point where Apple can command the premium prices they do. As Greenwald says, competitors are eating away at the edges of Apple every single day - it is not a lock AT ALL that the iPhone will be the "it" phone five years from now....Sprint for example is absolutely nuts to sign up to purchase 30MM iPhones over the next four years. As Jonathan Chaplin of Credit Suisse said, four years ago the "it" phone was the Razor - can you imagine buying a Razor now?
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Our disagreement is not necessarily in the timing aspect of it, but on the MOS. The MOS of US bank investments in aggregate has become even greater because of a collapse in prices. In fact, there is no other sector that I can see that has a greater MOS. Downside protection is there.
WFC may not currently be a 50-cent dollar, but if it is a 70-cent dollar that increases IV at a rate of, say, 6% over current IV (just throwing out numbers), that gets you a damn good return over three to five years when Mr. Market realizes his mistake. It's all about lengthening the time of your thinking.
I think it's a mistake to completely pass up some of these financials in the hopes that prices will collapse even further, although you can certainly base position sizing on what you think the market will do. But as you say, this debate is what makes a market.
How are you guys getting comfortable with the derivative risk on Wells Fargo's balance sheet?
I think that comes down to comfort with managent - as Buffett says, the CEO needs to be the Chief Risk Officer.
I'm comfortable with WFC b/c they don't have a black box prop trading unit. Its I-banking unit is primarily fee-based revenue.
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Vinod - other than holding fins, I don't know if you could have worded what I am thinking any better. Im even around 80pc long right now!
I'm surprised you are comfortable holding BAC (guess it depends on position sizing too, since a big position to me is 10pc) given ur view on where the economy could ultimately end up. IMO, if even half of the Great Depression scenario plays out, banks will get crushed.
But, Ben, aren't you making the same mistake you described with CAT with US financials? Let's say you are correct that the market is valuing many of these companies incorrectly based on a current earnings multiple that incorporates peak earnings rather than mid-cycle earnings.
The same is certainly not true of the US banks. If anything, the markets are valuing US financials as though they will forever have EPS at trough earnings.
Forget BAC because clearly you are worried about a big hole in the balance sheet there due to legal problems. But what about a WFC, BK, or a GS? Don't you think the market is valuing them as though their earnings will collapse for the next decade?
Unless you believe there are humongous write downs to occur in the future, isn't now the time to buy US financials in aggregate in terms of pricing? (Note that I'm just talking about US financials, not financials in Europe or anywhere else.)
It's getting close to the time to buy fins as a group, and WFC specifically. I think the time it takes to get to "normalized" earnings power is going to be longer than many investors expect due to the environment we're in. There is ZERO demand for loans bc the private sector is deleveraging massively. WFC and USB will probably be the only large US banks that actually can increase their core intrinsic value through this environment, but I would venture to say that gain will be lower than many believe. We just spent 10 years over-borrowing - the only logical conclusion out of that is that the banking system over-earned for the past ten years. Thus I do not believe current "trough" earnings are in fact trough - perhaps slightly below mid-cycle. I'm not saying banks aren't becoming more attractive, they are, and I am certainly closer to buying (as a group) now than I was 20% ago on the XLF.
The banks certainly over-earned over the last ten years, especially because a lot of those earnings disappeared through massive write downs. But I have to disagree on whether bank earnings have much further to drop -- I think we will find in the next few years that the US banks are at trough earnings right now.
Additionally, you have to look at both P and E. Right now P relative to E is ridiculous for the financial sector as a whole and for particular companies that I believe the market is misjudging as zeros. As WEB has said the decline in US bank stocks hasn't made much sense.
http://money.cnn.com/video/news/2011/10/04/n_co_buffett_banks_selloff.cnnmoney/
How do we know what "normal" is when loan demand and growth continues to decline? What does a "normal" loan book look like for WFC in a normalized environment? Its current loan book is still running off in a sense.
I have an extremely rough guess as to what that normalized number may be, but regardless, I think it is going to take awhile to reach that normalized state. So if we think WFC is worth $50 in a normal environment, but we won't reach that environment for 3 years, then we have to discount that back two years at a 10% cost of equity for a current FV of $41.
I want to buy a bank at 50 cents on the dollar - when WFC reaches that, I'll buy. The example above is purely for demonstration. IMO the FV could arguably be lower than $50 in a normal environment, and could take longer to reach normal. Thus I am going to demand a greater margin of safety than 50% of $41.
Some may call it timing, other may call it making a macro call - I call it valuation and demanding a MOS. All of the so called "macro" debate really comes down to the varying degress of MOSs we demand and our valuation. That's what makes a marketplace and what makes the debate on this board so valuable!
Take a look at the numbers for WFC though. What have total interest bearing liabilities done YoY compared to total interest earning assets? Yes, NIM compression is there, but is the market correctly judging what the earnings will be going forward? And aren't both the assets and liabilities on the balance sheets much less riskier than they were pre-financial crisis?
Our disagreement is not necessarily in the timing aspect of it, but on the MOS. The MOS of US bank investments in aggregate has become even greater because of a collapse in prices. In fact, there is no other sector that I can see that has a greater MOS. Downside protection is there.
WFC may not currently be a 50-cent dollar, but if it is a 70-cent dollar that increases IV at a rate of, say, 6% over current IV (just throwing out numbers), that gets you a damn good return over three to five years when Mr. Market realizes his mistake. It's all about lengthening the time of your thinking.
I think it's a mistake to completely pass up some of these financials in the hopes that prices will collapse even further, although you can certainly base position sizing on what you think the market will do. But as you say, this debate is what makes a market.
When I can get Pepsi at 60-cents on the dollar with 1) pricing power, 2) organic growth and 3) a 5%+ dividend/buyback payout, I'm going to take that all day versus buying an American banking balance sheet that has overstated assets and undersetated liabilities (the US banking system as a whole) or WFC at 70 or even 60-cents on the dollar that has low growth, modest payout and the same discount to fair value.
Again, this is all what makes a market ;D
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Vinod - other than holding fins, I don't know if you could have worded what I am thinking any better. Im even around 80pc long right now!
I'm surprised you are comfortable holding BAC (guess it depends on position sizing too, since a big position to me is 10pc) given ur view on where the economy could ultimately end up. IMO, if even half of the Great Depression scenario plays out, banks will get crushed.
But, Ben, aren't you making the same mistake you described with CAT with US financials? Let's say you are correct that the market is valuing many of these companies incorrectly based on a current earnings multiple that incorporates peak earnings rather than mid-cycle earnings.
The same is certainly not true of the US banks. If anything, the markets are valuing US financials as though they will forever have EPS at trough earnings.
Forget BAC because clearly you are worried about a big hole in the balance sheet there due to legal problems. But what about a WFC, BK, or a GS? Don't you think the market is valuing them as though their earnings will collapse for the next decade?
Unless you believe there are humongous write downs to occur in the future, isn't now the time to buy US financials in aggregate in terms of pricing? (Note that I'm just talking about US financials, not financials in Europe or anywhere else.)
It's getting close to the time to buy fins as a group, and WFC specifically. I think the time it takes to get to "normalized" earnings power is going to be longer than many investors expect due to the environment we're in. There is ZERO demand for loans bc the private sector is deleveraging massively. WFC and USB will probably be the only large US banks that actually can increase their core intrinsic value through this environment, but I would venture to say that gain will be lower than many believe. We just spent 10 years over-borrowing - the only logical conclusion out of that is that the banking system over-earned for the past ten years. Thus I do not believe current "trough" earnings are in fact trough - perhaps slightly below mid-cycle. I'm not saying banks aren't becoming more attractive, they are, and I am certainly closer to buying (as a group) now than I was 20% ago on the XLF.
The banks certainly over-earned over the last ten years, especially because a lot of those earnings disappeared through massive write downs. But I have to disagree on whether bank earnings have much further to drop -- I think we will find in the next few years that the US banks are at trough earnings right now.
Additionally, you have to look at both P and E. Right now P relative to E is ridiculous for the financial sector as a whole and for particular companies that I believe the market is misjudging as zeros. As WEB has said the decline in US bank stocks hasn't made much sense.
http://money.cnn.com/video/news/2011/10/04/n_co_buffett_banks_selloff.cnnmoney/
How do we know what "normal" is when loan demand and growth continues to decline? What does a "normal" loan book look like for WFC in a normalized environment? Its current loan book is still running off in a sense.
I have an extremely rough guess as to what that normalized number may be, but regardless, I think it is going to take awhile to reach that normalized state. So if we think WFC is worth $50 in a normal environment, but we won't reach that environment for 3 years, then we have to discount that back two years at a 10% cost of equity for a current FV of $41.
I want to buy a bank at 50 cents on the dollar - when WFC reaches that, I'll buy. The example above is purely for demonstration. IMO the FV could arguably be lower than $50 in a normal environment, and could take longer to reach normal. Thus I am going to demand a greater margin of safety than 50% of $41.
Some may call it timing, other may call it making a macro call - I call it valuation and demanding a MOS. All of the so called "macro" debate really comes down to the varying degress of MOSs we demand and our valuation. That's what makes a marketplace and what makes the debate on this board so valuable!
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IMO, this just reiterates the complacency in the marketplace regarding the environment Prem is worried about.
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Vinod I think you said something very important here that I haven't seen before mentioned on this board. The most important line from your post, in my opinion is this:
I came from a very poor family, and I do not every want to be that poor again.
Everyone here should understand that each investor has a different financial background, base of capital, and expectations for long-term returns. Some of us here are in a position where we must guard our capital as it is newly formed and constitutes a huge portion of our net worth's, others may be fiduciaries for more aggressive capital. When adding this layer of perspective, I can see why everyone on this board may be right as it relates to their individual situation.
The capital I invest is 100% risk capital, and I have a very long horizon. I don't need to touch this capital for years even decades. That is why I may appear a little more aggressive to some of you. I did not come from a poor family and was blessed in that regard, that does not mean I am prone to risk, but that may be why I am more optimistic about the future and and able to sleep at night with significant volatility and paper losses.
The thing about the market for me is that I am a big believer in human potential and the stock market is essentially a monopoly on capital flows, so over-time if I buy the right companies I will do very well. Some of you here may do better by timing the market buying the same stocks I buy, but over-time my experience with timing markets has not been great. While buying things on the way down has generated some handsome profits.
The way I see it, most of this capital will end up being inherited by my daughters and so I truly don't need to worry about daily fluctuations or perfect entries/exits.
So with Bmichaud for example, if you are right you may compound at an additional 5-10% over the next 5 years. Which will really be awesome for you. But if I am right, you may miss an entry point all together, and most definitely compound at inferior rates. Now there are plenty of ways to skin the cat, but incidentally, I have gotten to this point by deploying capital this way for nearly two decades, so I am comfortable waiting another year or two if I am wrong.
Oh one more thing - about the money printing, I think I deserve some credit here for calling the long-dated security buys. We have already established that buying 30 year treasuries is essentially printing money.
Albert Friedberg's letter will be out next week. He has absolutely nailed it these last two months up 30% on a 2 billion dollar fund. I pasted his last letter and will do the same if you guys are interested but this week I heard that he is betting heavily on inflation. You can bet your arses the fed will get it's inflation.
The beautiful thing about this business is that we can all be right at the exact same time. Berkowitz will claim he's right in 10 years when BAC reaches $30, while at the same time I can claim I was right by holding off on BAC at $15 as it cratered to $6.
As Prem Watsa so elegantly explained in his interview with Gurufocus, he is very, very worried about the "second leg down" in this environment. Yes the US is moving along at essentially flat growth, with the large risk that it falls back into recession in and of itself - BUT, the huge external risk NOBODY is taking into account is the austerity measures currently being put in place over in Europe and the slowdown in emerging markets. We truly have seen nothing yet in Europe - if one understands sectoral balances within an economy, one can only conclude that Europe is teetering on the brink of depression, yes depression NOT recession. The Europeans despise the American deficits, and they do not want to be labeled as such. To the penny, public sector deficit equals private sector surplus, and public sector surplus equals private sector deficit. The ONLY way to smooth out private sector deleveraging is for the public sector to run a deficit - when a public sector does what the USA did in the Depression (cut deficits and raise rates) and what Europe is doing now, not only must the private sector pay down debt, but they also must PAY THE GOVERNMENT b/c the government is pulling assets out of the private sector's hands. It's a double whammy - saving to pay down debt AND paying the government.
So forgetting the US economy right now, and ignoring the fact that the ECRI says there is a 100% chance we're going back into recession, we have an economy the size of the USA heading into depression (the EU) and emerging markets slowing down. Let's not forget, China NEVER took a break - they stimulated their way right through the global recession. No economy goes straight up, none - especially one that is in bubble territory.
All of that was far too macro for any value investment discussion - the single most important thing I am trying to convey is WHY there is a strong possibility the market as a whole (and dragging all things down with it) can not only get below fair value (950 according to Grantham) but STAY below for an extended period of time. It all comes down to valuation. If the market was at 800, you wouldn't hear a single word from me regarding the macro environment b/c the undervaluation would be discounting all of this. As Buffett said in the November 1974 Forbes article, "AT THESE PRICES, I am not worried about recession, war, etc...etc...". Even when Buffett was finding bargain stocks selling for 50% of liqudiation value, he was still hedging his overall portfolio exposure to the general market via controls and workouts. The blueprint for managing general market risk is laid out in all of his BPL letters - his way of managing money now behind a corporate veil is not prudent for those of us managing a fixed amount of money. IMO, his BPL days represent the epitome of how money managers should be leery of hte general market and take appropriate action.
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Vinod - other than holding fins, I don't know if you could have worded what I am thinking any better. Im even around 80pc long right now!
I'm surprised you are comfortable holding BAC (guess it depends on position sizing too, since a big position to me is 10pc) given ur view on where the economy could ultimately end up. IMO, if even half of the Great Depression scenario plays out, banks will get crushed.
But, Ben, aren't you making the same mistake you described with CAT with US financials? Let's say you are correct that the market is valuing many of these companies incorrectly based on a current earnings multiple that incorporates peak earnings rather than mid-cycle earnings.
The same is certainly not true of the US banks. If anything, the markets are valuing US financials as though they will forever have EPS at trough earnings.
Forget BAC because clearly you are worried about a big hole in the balance sheet there due to legal problems. But what about a WFC, BK, or a GS? Don't you think the market is valuing them as though their earnings will collapse for the next decade?
Unless you believe there are humongous write downs to occur in the future, isn't now the time to buy US financials in aggregate in terms of pricing? (Note that I'm just talking about US financials, not financials in Europe or anywhere else.)
It's getting close to the time to buy fins as a group, and WFC specifically. I think the time it takes to get to "normalized" earnings power is going to be longer than many investors expect due to the environment we're in. There is ZERO demand for loans bc the private sector is deleveraging massively. WFC and USB will probably be the only large US banks that actually can increase their core intrinsic value through this environment, but I would venture to say that gain will be lower than many believe. We just spent 10 years over-borrowing - the only logical conclusion out of that is that the banking system over-earned for the past ten years. Thus I do not believe current "trough" earnings are in fact trough - perhaps slightly below mid-cycle. I'm not saying banks aren't becoming more attractive, they are, and I am certainly closer to buying (as a group) now than I was 20% ago on the XLF.
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Vinod - other than holding fins, I don't know if you could have worded what I am thinking any better. Im even around 80pc long right now!
I'm surprised you are comfortable holding BAC (guess it depends on position sizing too, since a big position to me is 10pc) given ur view on where the economy could ultimately end up. IMO, if even half of the Great Depression scenario plays out, banks will get crushed.
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Ben I was going to literally do the same thing. Parsad, that is exactly what my definition of a "real" value investor is.
Bmichaud I am not sure why that quote discredits the rest of the post. Just because I am viewing a forward PE and you view a trailing PE, the S&P Today is indeed reflecting a 9.9 P/E Ratio.
Not that you're viewing a forward PE but rather that you are looking at a PE based on dramatically peak earnings. A 12X on operating eps of $100 (or thereabouts) is not even remotely relevant to a cyclical data set. It's no different than saying CAT is cheap based on $6 eps when in fact mid-cycle eps is probably more like $3.50 or $4.
And I won't even get into the danger of relying on Fed "money printing" when in fact the Fed is merely swapping non-interest bearing liabilities (cash) for an interest-bearing liability (treasuries) - that does NOTHING in a deleveraging environment.
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S&P is trading at 9.9x 2012 earnings and a near 2% dividend yield
This quote completely discredits the rest of the post. At 1,124 on the S&P and 10y median inflation-adjusted earnings of $63, the S&P has a True PE of 17.7X.
The "real value investors" are still being prudent with their capital waiting for a state of undervaluation that creates the margin of safety all "real value investors" seek when managing their money.
Buffett's quote in a November 1974 Forbes article: "Look, I can't construct a disaster-proof portfolio. But if you're only worried about corporate profits, panic or depression, these things don't bother me at these prices." That was as of November 1, 1974.
Guess what the True PE of the market was back then.....8.59X. The earnings yield for the market was 11.6% versus the long-run average 10y treasury rate of 3.79% (the long-run 10y treasury yield up until November 1974) for a spread of 7.9%.
At a True PE of 17.7X, the EY on the market is 5.6%. The long-run 10y treasury rate is currently 4.68% for a spread of .96%. If we use the average rate as of November 1974, the current spread is 1.85%.
A spread of 1.85% doesn't sound the ALL IN alarm for a lot of "real value investors".
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When do your investees need thier money? If they need it in a few years, then they should not be invested in non-hedged equities. If it is longer, then maybe the best course is to explain that they may loose a portion of there capital in a given year but will over the long term recoup it. Alternatively, you can hedge using S&P 500 puts as Frank Martin does but your returns will be lower.
Packer
My investees want me to beat the market by a particular margin on average over time. If I think we are in a secular bear, we're entering a recession, AND the environment is unlike anything we've seen since the Great Depression, then something like the banks are not going to perform well through that environment. If the market goes down 20% and I'm holding something that goes down 35%, I need to return 54% to break even while the market needs to return 25% to break even.
So ya over time my investees will break even, but unless I'm cranking on the upside, I'm better off holding something that will strongly outperform in a flat to down market than something that is highly sensitive to economic movements, then when there is blood in the streets and the marketplace is being put up for sale I want to buy banks, industrials and materials (banks are pretty close to that point, but I believe asset values are overstated and liabilities are understated and we have a lot more pain to go through). It sounds very much like timing, but it is very much valuation. Banks' "normal" earning power is being overstated by the marketplace as a result of investors treating this recession as a post-WW2 recession. We're going to be awhile before getting back to normal, and there will most likely be more pain between now and then - thus I believe I will be able to buy the banks at a better discount to intrinsic value than currently available. Similar with cyclicals (peter burke mentions this above) - CAT appears cheap, but earnings are not at mid-cycle earnings right now, they are well above and HEAVILY reliant upon China. Look at Deere and Mosaic - both look cheap based on current earning power but current earning power is above mid-cycle levels and again dependent upon a commodity boom.
If your belief is that it is a secular bear market, why not just hold cash ? you will come out smelling like roses. (assuming you haven't committed to be invested all the time.)
Also, aren't you better off just turning down that kind of investors who chose their time frame rather than yours?
I didn't say anything about time frame - the only requirement is that I beat the market over time, and IMO holding BAC as it falls from $6 to $3 as the market falls 25% does not constitute beating the market. And instead of holding cash as you mentioned, I'd rather A) hold something that has a strong chance of increasing its intrinsic value no matter what the environment at an attractive price (i.e. Pepsi selling for $60 with a 6% payout, 6% growth and a $100 fair value), or B) something with an event tied to it. Then when there is blood in the streets and nobody wants to own emerging markets, cyclicals, industrials, banks etc... etc... then I will roll my economically insensitive names and event stocks into beaten down stubs selling for 10 and 20% of intrinsic value.
I was thinking about this today on my way into work - the beautiful thing about this business is that we can all be right at the exact same time. Berkowitz can be right on BAC buying it at $15 if in fact it does go to $30 over a five year period, while at the same time I can be right holding off on BAC until $8 because I am waiting for a price that will yield a 30% IRR over a 5-year period.
Applying a little bit of logic to BAC though will lead one to conclude that given that we are in an environment VERY DIFFERENT than anything we've experienced since the Great Depression that $30 probably isn't an appropriate fair value for BAC considering the write-downs that are still to come, the less-than-transparent balance sheet, and the possibility for further dilution. So assuming a $20 fair value and my 30% 5y IRR requirement, I'm only just now getting interested in BAC at $5.38 per share. Following my gut even further tells me that this POS is probably not worth more than $15 considering their inability to appropriately disclose what the true value of their assets and liabilities are and the hole that is most likely in their balance sheet - thus I won't get interested in this until $4 per share.
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cyclical companies earnings est have come way down. but lots of those stocks are down 50% already. see the specialty chemicals. I really doubt the estimates for food drug and other consumer non durable estimates will come down much. financials? dirt cheap and reflective of a terrible backdrop. and tech? hp is at 5 times, msft and intel at 9 times, cisco at 10 x. great companies sell at 15 x. prices already reflect a lot of the bears waiting for Prem's scenario to unfold. Buffett tells you to value businesses. look bottom up not top down. I see a lot of people get caught in the "macro" moment, afraid to buy cheap stocks because of "what's out there". this of course has always been a mistake.
There's room for both buying cheap stocks and creating a margin of safety within your portfolio via holding cash and/or hedging. My rhetoric may sound like I'm 100% hedged as Hussman is, but I'm actually 75% net long at the moment. Once the market hits fair value I will most likely be 100% net long in spite of my belief that we could go well below fair value and stay there for an extended period of time. To be fair, the 75% net long is made up of several "event" situations, so the actual exposure to the market may be lower than that, but that is more the result of being able to find more special situations/events than a diversified portfolio of long ideas with strong return prospects (i.e. 30% IRRs).
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When do your investees need thier money? If they need it in a few years, then they should not be invested in non-hedged equities. If it is longer, then maybe the best course is to explain that they may loose a portion of there capital in a given year but will over the long term recoup it. Alternatively, you can hedge using S&P 500 puts as Frank Martin does but your returns will be lower.
Packer
My investees want me to beat the market by a particular margin on average over time. If I think we are in a secular bear, we're entering a recession, AND the environment is unlike anything we've seen since the Great Depression, then something like the banks are not going to perform well through that environment. If the market goes down 20% and I'm holding something that goes down 35%, I need to return 54% to break even while the market needs to return 25% to break even.
So ya over time my investees will break even, but unless I'm cranking on the upside, I'm better off holding something that will strongly outperform in a flat to down market than something that is highly sensitive to economic movements, then when there is blood in the streets and the marketplace is being put up for sale I want to buy banks, industrials and materials (banks are pretty close to that point, but I believe asset values are overstated and liabilities are understated and we have a lot more pain to go through). It sounds very much like timing, but it is very much valuation. Banks' "normal" earning power is being overstated by the marketplace as a result of investors treating this recession as a post-WW2 recession. We're going to be awhile before getting back to normal, and there will most likely be more pain between now and then - thus I believe I will be able to buy the banks at a better discount to intrinsic value than currently available. Similar with cyclicals (peter burke mentions this above) - CAT appears cheap, but earnings are not at mid-cycle earnings right now, they are well above and HEAVILY reliant upon China. Look at Deere and Mosaic - both look cheap based on current earning power but current earning power is above mid-cycle levels and again dependent upon a commodity boom.
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Well said bmichaud, especially the following observation (which most seem to completely ignore):
Earning power is already overstated given well above average profit margins, thus are very susceptible to external shocks.
Even lower interest rate and falling commodities price will likely help profit margin further. But fear is powerful, when ppl don't invest and spend because of that, the market is toasted.
Temporary factors will assist margins in the short-run, but as Grantham says (in not so many words), if net profit margins were not mean reverting, then capitalism would be considered a failure. High margins attract competition, thus profit margins are extremely mean reverting over time.
Let's take the O&G industry for example. With commodities at all-time highs, profit margins for the O&G industry are at elevated levels, thus all sorts of competition will be drawn to drilling for oily liquids all over the US. We can see how this is already driving up the cost of oil field services, and when the underlying commodity ultimately corrects, independent/unhedged/leveraged E&P companies will be in trouble. Side note, all commodity bulls check out this article (http://pragcap.com/randall-wray-on-the-commodity-bubble)
Competition is perpetually eating away at Apple, Google, Yahoo, HPQ, etc.. etc... and will eventually bring those margins down over time. Cyclical companies such as Caterpillar & Cummins admittedly are relying HEAVILY upon the China economic machine - how long is that going to last?
China to install more than 2,000 gold ATMs
in General Discussion
Posted
We'll agree to disagree..but as I sign off from this topic, I would strongly encourage you to take the time to study Warren Mosler/Cullen Roche's writings in order to at least see why the govt should NOT be run like a household.
Believe it or not, but I very much enjoy studying the other side of a debate. If you promise to take a week and study their stuff I would gladly accept any articles and books you may suggest so that I can study your side of the aisle.
At one point I believed as you did, and shorted USTs in droves. It wasn't until their stuff that I realized why it is (or was) a fruitless bet due to the monetary system and forces actually in play.