bmichaud

In December 2007 there was one massive defined risk to the economy and stock market: the popping of the housing induced credit bubble and its associated ripples effects. You just listed off 10 risks that could likely be listed off every 1 out of 2 years going back to 1900. How do you act upon that list?

Dr. Hussman looks through history and attempts to fit data to each significant market peak, specifically: 1929, 1968, 1973, 1987, 1999 and 2007. I find the following data interesting. (ERP = equity risk premium = earnings yield - 10y UST) 1929: Schiller PE 31.48, 10y UST 3.42, ERP -.24 1968: 22.38, 6.03, -1.56 1973: 18.71, 6.46, -1.12 1987: 18.33, 8.76, -3.30 1999: 43.83, 5.79, -3.51 2007: 27.54, 4.75, -1.12 Average PE: 27.05 Average ERP: -1.81 Present Data: SPX: 1841 Schiller EPS: ~72 Schiller PE: 25.57 EY: 3.91 10y UST: 3 ERP: .91 SPX at average PE: 1948 SPX at average ERP: 3288 (@ 4% 10y) SPX at 1929 ERP: 2609 (@ 3% 10y) Given.... 1. Recession is off the table - as evidenced by surging intermodal carloads, declining initial jobless claims, steepening yield curve and plummeting gold prices 2. Broad-based market leadership - all sectors save materials and energy participating in market rise 3. Lack of volatility typically associates with market tops 4. Accelerating equity fund inflows 5. Strong "neutral" sentiment in various investor surveys ....It appears there is significant room for the market to run before we begin to see downside pressure. For context around the 1987 bubble, the market returned 21% in 1985, 27% in 1986 and 25% into the 1987 market peak. (These aren't exact figures, as they are month end prices from the Schiller data excel sheet) Until the market says it's time to get out via rising volatility and narrowing leadership, it appears futile to try to hedge this market right now, to say the least...

Here is Hussmans latest on the probability of a market crash. http://www.hussman.net/wmc/wmc131230.htm

Fiat would be my conviction long for the year. Once this Chrysler deal goes through, I think we r off to the races.

With the easiest Fed on record, an accelerating economy, revenue growth finally in sight, record buybacks, low inflation, no recession on the horizon and everyone discussing the possibility of a bubble, I sincerely wonder if we don't get a 1987-type of bubble and crash. If I'm not mistaken, the Fed began tightening well before the 87 crash, the dollar was in free fall and market leadership was narrowing. Now? Broad based market leadership, an easy Fed, significant momentum and healthy skepticism that this rally can continue, as evidenced by the "neutral" category remaining in the 30% range in the various sentiment gauges, which helps offset the lack of bears.

Aber - besides valuation, what warning signs do you see right now that are akin to 2007? Recession, fed tightening cycle, European debt flare up?

http://blogs.reuters.com/unstructuredfinance/2013/12/09/jim-chanos-bad-news-bear-urges-market-prudence/ Given how bad Chanos' record is, perhaps him going out to raise capital for more shorting is a buy signal

Personally, I'd stack Sanjeev up against any manager in the world. 1. Incredibly consistent, repeatable process 2. No leverage 3. Concentrated but disciplined position sizing 4. Industry agnostic 5. Unmatched ability, from what I've seen, to average down on a name Give Monish and Sanjeev $1 billion each, I'd take Sanjeev any day of the week.

Amen brother. There are so many things wrong with Jay's scenario. 1) Everything needs to be done by a lawyer, properly, and legally, or there will be trouble. There is no discretion on this point. None! And there goes your margins. 2). Even with a legal document you can kiss the relationship goodbye if things go for a dumper. 3) Getting wealthy takes time, with or without leverage. Count on 15 years to self sufficiency, if your a good stock picker, or Ericopoly. There is no easier way. It's called ERICOPOLENVY - Eric explains his process and use of leverage as if it were as simple as taking his Tesla for a Sunday afternoon spin around the block. His posts should come with the disclaimer in his signature, WARNING: Professional at work. Do not attempt without adult supervision.

Good thoughts Wellmont. Dinans interview was phenomenal. Love how he thinks. Both NDR and Cullen Roche have strong economic forecasting records and both are strongly suggesting accelerating growth next year based on their models. Tough to see the risk of more than a 10 to 15% pullback with no recession.

Yessir.

Will be interesting to see if GMO's "new paradigm" commodity thesis ends up playing out...if so, this is a great buying opportunity.

6. References to Buffett and Munger as "Warren" and "Charlie". HAHAHAHHAHAH i'm doing a lot of LOL'ing today. big smile.

Legitimately LOL'ed at this post. Smile.

Larry's latest lol: http://www.swingtradingdaily.com/2013/12/16/2014-the-first-year-of-the-21st-century-dark-age/

Ned Davis Research is a headline article in Barron's this morning. I strongly recommend!!

hahahah I actually intended for it to be more about the war part. I was just noting he has made good calls on gold, but if you dig a little deeper, he will tell you he has called every major turn in every major asset class for the past 30 years, so..... I forgot to thank Mr. B for the excellent piece on war BTW!! 8)

I am not at all expecting a response of any kind, as I am extremely late to this party and it is likely highly annoying to have someone asking such basic questions this late in the game....but I am going to ask anyway..... On page 27 of the Perry Complaint, paragraph 71 states the following: "Before Treasury exercises its temporary authority to purchase the Companies' securities, HERA requires Treasury to determine that the financial support is necessary to "provide stability to the financial markets," "prevent disruptions in the availability of mortgage finance," and "protect the taxpayer." In making these determinations, HERA further requires Treasury to "take into consideration" several factors, including the "plan for the orderly resumption of private market funding or capital market access," and the "need to maintain [the] status [of Fannie and Freddie] as...private shareholder-owned compan[ies]." At first glance, the last bolded point appears quite compelling from a government agency responsibility perspective. However, here is what the HERA actually says: From H. R. 3221--30 of the HERA: "© CONSIDERATIONS.--To protect the taxpayers, the Secretary of the Treasury shall take into consideration the following in connection with exercising the authority contained in this paragraph: ....... "(v) The need to maintain the corporation's status as a private shareholder-owned company. I interpret the Perry section as: no matter what Treasury does with respect to its temporary authority to purchase F&F obligations, it NEEDS to maintain the private shareholder status of F&F (public securities trading as penny stocks with no apparent future do not count as maintaining private shareholder status). I interpret the HERA section as: in order to protect the taxpayer, the Treasury can reevaluate the "need" to maintain the private shareholder status and deem it unnecessary in the spirit of "protecting the taxpayer" - in other words, the govt has extreme latitude to impose the net worth sweep in order to "protect the taxpayer". If there is no response, I will deem my confusion between the two interpretations moot. But, if anyone else has considered how one should interpret this HERA passage, I'd love to hear your thoughts. HERA_of_2008.pdf Perry_Capital_FHFA_Complaint.pdf

I had not read Perry Capital's complaint until yesterday (not yet finished), but I think they make more compelling "taking" case given they purchased their preferred position in 2010 before the net worth sweep was implemented. This appears to assume, however, that the FHFA should legally be held to its word that its job was to rehabilitate F&F until they were stabilized, and that the F&F securities should remain outstanding due to the potential for this rehabilitation, which the net worth sweep entirely negates.

Lol wow that really was a dumb question. Thank you for the info though!

Sorry for the ignorance, but can you explain the BNA taxation port? Does it invest in tax credits or something like that? (likely an incredibly dumb question, just am trying to learn more about various taxation strategies etc...)

How is using Chanos as a hedging tool any different than your fund holding 40% cash or whatever it is? I agree, Chanos' fund should not be held over the long-term in the vein of "reducing portfolio volatility" as MPT would suggest. But that's not the debate (or at least I thought based on your "he adds no value" commentary), the debate is (or should be) does Chanos add value to the service he provides - i.e. as a hedge. Just b/c institutions have a faulty MPT-based view of portfolio management doesn't mean Chanos doesn't add value. Who is to say Chanos would not be around if a good portion of the hedge fund industry simply gave up trying to manage their own short book and just outsourced it to Chanos? How do we even know what % of his AUM are comprised of MPT-believing institutions? If you were Icahn, who currently wants to hedge (and is hedging) his portfolio, why would you not just outsource it to Chanos in order to avoid the large performance drag an SPX short position imposes?

Very impressive record. Is he a purely short fund? Looks like a market-neutral fund given the unimpressive returns since 2009. It goes back to whether this is a hedging debate or a does-chanos-add-value debate. If Chanos is viewed as a hedging tool, he adds significant value and would be preferred over PCM in tough environments. If it is a Chanos v. PCM over the long-term debate (who would ever hold a short-biased fund for the long term....), then obviously PCM wins. BUT, if that is the debate, then even PCM loses out to superior long-term compounders such as Loeb, Ackman, Icahn and Buffett. It's unfair to compare PCM to Chanos if PCM is not short-only or largely short-biased. If Chanos is used as a hedging tool, then it is a highly valuable fund. There are few non-short biased funds out there (at least to my knowledge) that consistently generate positive returns through nasty downturns like the PCM fund. Perhaps you know more. If so, then I stand corrected. Loeb, Einhorn, Ackman, Buffett, Icahn etc... etc.... all had negative years in 2008. If you were looking to hedge well-research undervalued companies through 2007 and 2008, you would not go out and double your long exposure by putting money into one of these funds (including PCM), you would go to cash or give money to Chanos. Nobody who is long biased can provide consistent protection in down markets.

I was wondering about that exact thing. My guess is Eric would say, assuming the dividend remains flat, that you just compound the no dividend leverage cost with the dividend yield on the strike price. So.... No dividend leverage cost is .5% in your example. The 1.08 dividend on the 18.33 strike is 5.9%. Adding 1 to each, multiplying together, then subtracting 1 gets you to 6.4% leverage. It's lower than the 1 year b/c the 1-year 2.85% no div leverage cost is spread out over 6 years. Hence 2.85% versus .5%. Now it's also interesting to consider if the dividends grow. Assuming the dividend grows 10% per year, I assume you would calculate each new dividend as a % of the original strike price. Then you would add 1 to each "new" strike price dividend yield, compound them all together and multiply by the original strike. Doing this I get to an adjusted strike of $28.40. So the cost of leverage is approximately 8.1% assuming GM grows the dividend by 10% per annum.

That's why I'm saying that this is a debate that probably won't be resolved. The people speaking out against Chanos (stripping away any personal issues they may have) believe that the opportunity cost of shorting is probably high -- with or without an investment in Chanos' fund. The people speaking in support of Chanos are saying that "If you must short, then..." The former group does not accept that premise. The latter group does. Ergo -- debates with no end. Here is Sanjeev on the matter: Again, the debate is not about hedging. Sanjeev is saying CHANOS PROVIDES NO VALUE WHATSOEVER, while pupil and I are saying, THE NUMBERS PROVE OTHERWISE. Sanjeev is saying Chanos had a couple of big hits. How can one possibly say that without providing evidence that he completely botched the 2005-2013 investment cycle? We only have returns through 2005, and they look pretty darn good. Clearly there is a bias against Chanos if one cannot honestly admit that he has an absolutely phenomenal long-run shorting track record, considering really the most he can make on each investment is 100%.