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bmichaud

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Everything posted by bmichaud

  1. I know I'm a bad value investor for admitting that I watch tv and don't read 10Ks 24/7, but I think the show is phenomenal. I've learned a ton from watching, as Marcus provides a great blue print for going in and fixing up poorly run small to medium size businesses. People, Process and Product! It's a great platform for him to get in cheap and expand massively. I'd love to see some follow ups in a couple of years showing how much he has expanded. For example he took a car dealership in NYC and franchised the business model across the country. Would love to see more of that. Yesterday they had him on cnbc and he briefly mentioned that he is not invested in a single public equity. Thought that was super interesting. Talk about needing to truly focus on owner earnings and reinvestment rates!
  2. Continuing to buy the RWM dips - bought more on this morning's market pop.
  3. When I'm logged out I can see the various categories, but when logged in it's just an amalgamation of the most recent posts... Sorry if I missed something from Parsad. Just am curious if anyone else is having the same problem.
  4. The throwing a dart comment is highly disturbing, and exactly why any intermediate term sentiment gauge I track remains stuck in highly optimistic territory, DESPITE a very obviously deteriorating market. Gunna take a lot of downside to shake out those making comments like that.
  5. I was using the S&P Industrials index that was used in the charts I attached yesterday. The PE is related to the ROE via the Dividend Discount Model. Say a model company has $10 of normalized earnings power, a 12% ROE and a 50% payout ratio. With 50% of earnings reinvested at 12%, you get 6% growth. If you command a 10% return at fair value, then your "fair value" PE is 12.5X. At fair value, the dividend yield would be 4%, plus the 6% growth gets you to your 10% required return. $5 dividend divided by 4% is $125, or a PE of 12.5X $10 EPS. Were this model company to have a 30% ROE ala Coke, and it grows in line with the economy at 6%, it only needs to retain 20% of its earnings in order to grow at that rate. So an $8 dividend (80% payout ratio) divided by 4% yields a $200 fair value per share, or 20X earnings. Hence my skepticism as to why the market should trade above 15X earnings with an ROE of 12%. Say the S&P 500's normalized profit margin is 7% versus the 9% projected (which is only 30% higher than the 7%). "normal" eps would be $77. With low rates forever, say it's worth 18X, or $1,386. Assuming rates get to somewhat normal levels and the PE is 16X, fair value is 1,232. The possibilities are endless. And why after years of remaining above fair value should the market stop at fair value? Don't assets usually overshoot? What if we get a sustained bout of above-average inflation and the market races down to 10 or 12 times earnings and stays at that valuation for a decade? Who knows.
  6. For nearly 10 years the market went nowhere with two significant drawdowns. The CAPE contracted from 20 to 10. Ugh. Now I think the biggest lesson to be learned from all of this - which Grantham touches on in his Barron's interview - is that you need a recession to bring all of this stuff back to the mean. So yes the market can stay overvalued for a long time. Though it doesn't mean cyclical factors such as sentiment, technicals etc.... can't get out of whack and produce something like 2011, the 1987 crash, EM crisis in 1997/8.
  7. I have been worrying about profit margins since about 2000 so I understand where you are coming from. Reading Hussman every Sunday night for nearly 600 weeks and following GMO and Shiller very closely would ensure that. 1. P/S ratio is screwed up due to inconsistent way in how sales are accounted for. Take GM for instance, they have equity partnerships in China, their sales do not show up in the denominator. Profits however show up on their income statement and this effects the earnings that are being reported and thus the price being paid for GM. The author shows that this effect is quite big over the last several years. P/S may in fact be high but the point is that it is nowhere near as high as implied by your chart due to this inconsistent data. 2. The same argument above also applies to profit margins. In addition, we also need to look at ROE. Just because profit margins are high does not mean they would mean revert. Say a company used to generate 10% ROE in the past with 6% margins, if the same company needs 10% margins to generate the same 10% ROE, then there would be no need to mean revert. There is evidence that this in fact had a major effect. Pzena had data around this in one of his recent letters. To take a more extreme example if your profit margins are higher than the past but your ROE is say below 5%, would other companies be rushing in to get the 5% ROE due to high profit margins? Vinod Regarding point #1: The author goes into excruciatingly painful detail to simply conclude that DOMESTIC CORPORATE BUSINESS NET PROFIT MARGINS are 49% above the 1947-2013 average and 55% above the 1947-2002 average. Please see attached. So honestly I have next to no idea what his overall point is, outside of debunking a chart that is simply one of many (even if it is wrong) pointing to the same thing.....profit margins are elevated well above historic norms. I'd love to see data supporting the "JV income is so massive it is distorting NPMs across the board" argument. Most of Coke's revenue flows through its sales line versus a JV calculation. Yes GM happens to have a large JV line - but what about Parker Hannifan, Cummins, Pepsi, Mondelez etc... etc....? That's hardly a factor, and I think it comes through in the author's chart I've attached. Regarding point #2: It's a great point if in fact average ROEs are at or below historic norms due to lower leverage and lower asset turnover. I would posit that given the exceedingly high leverage across sectors (govt, house, corp) and the low level of investment since the GFC, that leverage ratios and asset turns are higher than historic averages. Combined with above average profit margins, I imagine a broad look at ROEs would show well above-average levels. Point #1 Please see attached. The first chart shows EBIT vs GDP over the last 66 years. You would see that EBIT margin is about 12% higher than the median for the last 66 years. The main point is that margins are not as higher as it is made out to be by the bears. He is not saying margins are not high. Just that they are not as high as Hussman makes it out to be i.e. something like 60% or 70% higher than average. There are lots of reasons for why margins are high today. If you account for all these factors (JV income, lower taxes, lower interest expenses), margins are probably only 20% or so higher. This suggests caution not panic and abandonment of stocks which is which is what is implied by bears who suggest margins are 70% higher than historical average. Margins might go down to historical averages but even if it happens, it would be a multi-decade long process. Point #2 From the limited data that I have seen current ROE (properly adjusted as there are changes by S&P from what I heard during the late 1980s) is only modestly higher than in the past. Take a look at the bottom chart in the attached. It has historical ROE for developed countries together. A very kind gentleman on Fool provided some data for US when I asked this question (http://boards.fool.com/ot-long-term-averages-31148472.aspx?sort=whole#31151116). ROE for US is about 15% higher currently than the average of the past 3 decades. It does not include Financials & Utilities, so it is likely ROE is not even that high right now compared to historical averages. Vinod The EBIT margin data is interesting, but without adjusting for everything Jess Livermore did, I don't know how to square your statement that NPMs are only 20% above the new norm versus the 45 to 55% Livermore came to. But yes the point is taken that margins are not as high as Hussman would have you believe. I still don't know why that justifies paying such high multiples. Taking the 2012 sales level of 1,495 in the chart I posted yesterday for the S&P Industrial Average, and using an 8.5% NPM, earnings are $127. At a 2,500 index level (based on 1.71 x 2013 sales of 1,464), that's 19.7X earnings. Taking 20% off as you posit, the index is trading at 24.6X earnings. If margins are 30% too high, the index trades at 28X earnings. If in fact current earnings are "normal", then an average ROE should imply an average PE. A 12% average ROE??? Does this even justify a PE of 15X? Reversion to a 15X PE from the current 19.7X on the SPX Industrial Average would be a -24% decline. Applying that to the 1,890 S&P 500 level, FV would be 1,439.
  8. I have been worrying about profit margins since about 2000 so I understand where you are coming from. Reading Hussman every Sunday night for nearly 600 weeks and following GMO and Shiller very closely would ensure that. 1. P/S ratio is screwed up due to inconsistent way in how sales are accounted for. Take GM for instance, they have equity partnerships in China, their sales do not show up in the denominator. Profits however show up on their income statement and this effects the earnings that are being reported and thus the price being paid for GM. The author shows that this effect is quite big over the last several years. P/S may in fact be high but the point is that it is nowhere near as high as implied by your chart due to this inconsistent data. 2. The same argument above also applies to profit margins. In addition, we also need to look at ROE. Just because profit margins are high does not mean they would mean revert. Say a company used to generate 10% ROE in the past with 6% margins, if the same company needs 10% margins to generate the same 10% ROE, then there would be no need to mean revert. There is evidence that this in fact had a major effect. Pzena had data around this in one of his recent letters. To take a more extreme example if your profit margins are higher than the past but your ROE is say below 5%, would other companies be rushing in to get the 5% ROE due to high profit margins? Vinod Regarding point #1: The author goes into excruciatingly painful detail to simply conclude that DOMESTIC CORPORATE BUSINESS NET PROFIT MARGINS are 49% above the 1947-2013 average and 55% above the 1947-2002 average. Please see attached. So honestly I have next to no idea what his overall point is, outside of debunking a chart that is simply one of many (even if it is wrong) pointing to the same thing.....profit margins are elevated well above historic norms. I'd love to see data supporting the "JV income is so massive it is distorting NPMs across the board" argument. Most of Coke's revenue flows through its sales line versus a JV calculation. Yes GM happens to have a large JV line - but what about Parker Hannifan, Cummins, Pepsi, Mondelez etc... etc....? That's hardly a factor, and I think it comes through in the author's chart I've attached. Regarding point #2: It's a great point if in fact average ROEs are at or below historic norms due to lower leverage and lower asset turnover. I would posit that given the exceedingly high leverage across sectors (govt, house, corp) and the low level of investment since the GFC, that leverage ratios and asset turns are higher than historic averages. Combined with above average profit margins, I imagine a broad look at ROEs would show well above-average levels. Domestic_Corporate_Business_NPM.pdf
  9. Original, I am bearishly bent as it is, so I am biased....but ur bearishness over the past 15 years is justified, IMO. Stocks have done virtually nothing with two 50 percent downturns, yet because we are right back to absurd valuations, it appears historical "overvaluation" is the new normal, since we've been at these levels for the majority of the past 15 years. It's completely circular. High current valuations are required to justify 20 years of overvaluation, yet because of the high valuations for 20 years, stocks have returned hardly anything to speak of, thus nullifying the Bulls' point that "old" valuation metrics have failed to predict long term market returns. I agree with Grantham that you could get an even larger bubble until the next recession. Though...NDR is currently calling for a 2014 "reset" of the market similar to the 1987 crash. While not predicting a crash, they think a 2011 type decline will reset the market for a push to true bubble levels.
  10. Attached are two charts for the S&P Industrial Average: 1. Price to Sales Ratio going back to 1955 2. Profit Margins going back to 1955 Even if you conclude that margins are "permanently" higher than the historical average, the profit margin series is sharply mean reverting beginning with the '90's recession. Perhaps what goes along with a "new-age" of profit margins is more cyclicality via the "new-age" of enormous leverage. Just eyeballing the chart, an 8.5% margin is approximately 40% above call it a 6% average going back to 1990. Further - would investors have not concluded in 1987 that they were in a "new-age" of permanently "low" profit margins after nearly two decades of downtrending margins? Hmmmm.....me wonders if nearly two decades of uptrending margins is just as unsustainable.... Same goes for the price to sales ratio - obviously a chicken and egg thing here, but would investors have not concluded they were at a permanently lower valuation plateau after two decades of below-average valuation ratios? SP_Industrial_Average_Price_to_Sales_Ratio.pdf SP_Industrial_Average_Profit_Margins.pdf
  11. Two great "macro" articles that have nothing to do with individual stock picking: http://macronomy.blogspot.com/2014/03/credit-too-big-to-fall.html?m=1 http://macronomy.blogspot.com/2014/03/guest-post-equities-frothy-sentiment.html?m=1
  12. Great post on the extreme equity sentiment exhibited by investors right now: http://macronomy.blogspot.com/2014/03/guest-post-equities-frothy-sentiment.html?m=1
  13. Interesting article on deteriorating market breadth: http://www.seeitmarket.com/why-pullback-better-worse-than-seems-16039/ Perhaps it's a TWA-style buy-short-term-puts-in-May kind of year 8)
  14. In use it in accounts I'm unable to short in.
  15. Not that it's all about net worth, but.... Andreeson isn't even worth $1B according to this: http://en.wikipedia.org/wiki/Marc_Andreessen And how much is Icahn worth?....
  16. Roger that! I must've seen alnesh in a previous photo or something.
  17. Is Sanjeev to Monish's right or left? I Would have said to his left, our right, far right side of the picture.
  18. This decline is phenomenal - I've been wanting to add more. Given the likelihood the preferreds are paid off in full (as TWA has said multiple times on this thread, how bad does it look that regulators strongly encouraged banks to hold the preferreds as capital, but then pulled the rug out from under them...) but the extreme uncertainty in the common, I like a 2/1 allocation to FNMAS/FNMA. Say a 1% FNMA position goes to $0, but a 2% FNMAS position doubles, you're still up 50% on the pair.
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