original mungerville

I should end positively by saying that we can all make Alpha with good long-term value investing. I just would not count on a big wind at our backs - in real terms at least. This is what I have been trying to do and continue to do.

I really don't understand why everyone jumps on the macro thing? Oh markets propped up, it's the ECB, it's the FED, etc. Why can't this be just the classical case of a stock market that got a bit ahead of itself and is correcting back to where prices should be like it did many times in the past. Where do you think a fair price for the market is? S&P at 1,000? If stocks are overvalued by 10% or 20% what do you think it's more likely that the markets got a bit overexcited as they normally do or that there is an international central bank conspiracy to pull all the stops to push stock prices up by 20%? Maybe everyone needs to watch a little less CNBC. Look, if the US decided to go to a budget surplus along with Europe in order to actually pay back the debt, the S&P would be below $1000. If we find a way to maintain the current levered economic and financial system for another couple years, well maybe this little 10-20% correction is adequate for now. If we hit the inflection point I noted in my above post, or if the market loses confidence in the Fed, we will realize that in real terms, we already hit the highs for the next 15 years. In nominal terms, the Dow could be at a trillion in 15 years though. So I don't think this is straight-forward. It depends on your outlook and your timeframe. But I think everyone can agree that printing money and ever-increasing debt can not end well. It has to end horribly.

Debt is a demand for money by a certain time. If the debt doesn't get the money it implodes. With no more spread left in the developed world (other than a little in the US with 10-year at 2%), the only option left is to produce more new money to keep the game going (because unlike before, you can't produce more new debt to pay the old debt unless lower spreads help you juice the economy and asset values against which the new debt can be borrowed). This is why Dalio thinks they are going to need to monetize - especially if we get a US recession. OK, I read the link. He is saying what I was saying. Not raising rates is like bringing a knife to a gun fight. Its QE forever - thanks to all my "heroes" noted in my above post. I have said it before, but I'll say it again: you should all have at least 10% of your net-worth (or more) in precious metals. Right now, I would split that 50% gold miners, and 50% silver. I've heard the Buffett dig gold out of the ground and put it in a safe thing and he is right stocks will outperform Gold over a 100 years because although gold maintains purchasing power, it does not have a ROE above the rate of inflation like equities do. But, when we hit the inflection point noted in my above post, I think Gold will outperform stocks and bonds by a very wide margin.

Because in this know-nothing-but-think-they-do central bank money-printing debt-laden fucked up economic and financial system that the Greenspans, Summers, Geithners, Rubins, and execs in banking with perverse incentives feeding at the socialist-on-the-downside-capitalism-on-the-upside trough of compensation that this world created for us it can be important from time-to-time as we find ourselves trying to value invest. The economy has grown so well over the past 40 years in large part because of ever increasing amounts of debt (enabled by the aforementioned system of ours) which can be used to buy stuff and increase GDP. The one thing that has been there for the last 40 years to permit the debt to keep growing is spread. Spread since 1980 on the long-end and short-end (Greenspan-Bernanke-Yellen). Every time there was a recession or financial system problem, bond yields had room to move down across the spectrum, permitting the debt levels to be maintained, the economy to recover and the financial system to create more debt/or create more GDP (because you buy shit with debt its like increasing the money supply) which in turn juices all risk asset values, against which you can borrow more debt. Problem is, there is no spread left in Europe (witness negative yields). There is a little bit of spread in the US left (10 year around 2%) on the long-end. Fed thought they could lift off the short-end to ensure there was spread on the short-end (say 1-1.5% by 2017), well I guess not. Basically, we are one US recession away from a major inflection point (especially if it is at a time of global weakness). Watsa doesn't have deflation hedge losses for the fun of it. Either we go into recession then depression OR they print a shit ton of money to counter the next recession. Neither of those outcomes are particularly good long-term as at some point either risk assets (in the first scenario) or the bond market (in the latter scenario) will say "No Mas". At some point we will reach a point of inflection - not necessarily right now, but not in 5-10 years either, around the time of the next US/global recession. When that happens, this little correction we are experiencing is going to look like a fuckin' walk in the park. I don't think this is it but if a US recession is here, well...a lot of people are eventually going to lose a lot of money either in bonds or stocks. Its not like I wanted to know about this shit, I just wanted to buy cheap stocks as a value investor - its a lot more fun. While I am at it, the Fed is clueless. I have no idea why people feel the Fed can help when I can't remember the last time they got anything right - other than avoiding the collapse in 2009 which they in large part helped create through loose monetary policy, loose regulation, and overlooking the fact that just like you don't let gas truck drivers drive drunk, you don't let banking execs and traders have asymmetric pay packages. I think I am done.

You too had a hard time engaging the enemy after you lost Goose. There is something to be feared in fear itself, as the economy is in part a confidence thing. Large market collapses and currency crises can feed into the real economy. Will they? Well, we'll see. The odds are higher with a collapse rather than without one. Soros: Reflexivity. Bad shit causes more bad shit to happen and good shit can cause more good shit to happen. Said otherwise, its a complex adaptive system with multiple possible "end-states" although there is no real end as it is constantly changing.

What happens in China market tonight will be entertaining. they cut the rate as requested/demanded by the market. Now if it drops a further 10%, then are we going to see china do QE? Will fed have the balls to raise rates in a month? or will they fold and go for QE4? We live in interesting times... The reason this could get ugly is the Fed can not do a uturn immediately towards QE4. First they are going to come out and say something professional sounding like "Hey, you know about that rate raise, we were just kidding - again!". They may even think that will make a difference to the market, but at that point they may be bringing the equivalent of a knife to a gunfight. In which case, they will be caught off-guard by how little they actually helped the market. Remember, these are my humble prognostications only...odds of them all turning out to be correct is very low. Personally, I think they can absolutely do a u-turn. Running the Fed isn't a job for people who can't take criticism. If the Fed felt more QE would somehow help the economy get some legs, I see no reason why they shouldn't or wouldn't accept some criticism and make that choice. The problem is really that QE may not provide much for economic stimulus. Along with not raising rates, Yellin should take a more vocal approach about Washington's failure to implement meaningful stimulus. We probably shouldn't use the word "balls" when referring to today's fed..... Yellen has had a child. Did anyone seriously believe rates were going to be raised anytime in the next few years. .the best you were ever going to get was a 1/4 to 1% as a token. We had a hundred year event 6-7 years ago. It appears things will take a little longer than our mayfly perceptions to normalize. The bank stocks are pricing in no increase. The big guys are all dirt cheap at 11-12 times earnings. They are going to make tons of money going forward either way. For the purposes of a bear market definition being 20 %. The S&P is down 12.5% and the Dow is off ~ 14.5. Not much further to go. The TSX is down about 16%, and the energy stocks are deep in a bear. The only thing more hated that energy stocks might be gold miners. I mean gold has not declined that much over the past year relative to oil, but the miners have been smacked big time. Furthermore, oil/energy are gold miners second largest cost component. So with Gold not declining that much and oil really declining, it is really odd these miners are still being sold.

What happens in China market tonight will be entertaining. they cut the rate as requested/demanded by the market. Now if it drops a further 10%, then are we going to see china do QE? Will fed have the balls to raise rates in a month? or will they fold and go for QE4? We live in interesting times... The reason this could get ugly is the Fed can not do a uturn immediately towards QE4. First they are going to come out and say something professional sounding like "Hey, you know about that rate raise, we were just kidding - again!". They may even think that will make a difference to the market, but at that point they may be bringing the equivalent of a knife to a gunfight. In which case, they will be caught off-guard by how little they actually helped the market. Remember, these are my humble prognostications only...odds of them all turning out to be correct is very low. Personally, I think they can absolutely do a u-turn. Running the Fed isn't a job for people who can't take criticism. If the Fed felt more QE would somehow help the economy get some legs, I see no reason why they shouldn't or wouldn't accept some criticism and make that choice. The problem is really that QE may not provide much for economic stimulus. Along with not raising rates, Yellin should take a more vocal approach about Washington's failure to implement meaningful stimulus. No they can't do a uturn immediately - so this will take a few months or a couple/few thousand points on the Dow. I agree, QE does not provide economic stimulus but the Fed's policy has been that it does because it raises asset values and somehow those values help economic activity (without apparently having adverse unintended consequences - like ensuring enough cheap junk debt to finance an oil exploration boom which just went bust, etc). In any case, I don't think they can do a uturn until more pain is felt which is why I think there is a risk of this sharp correction continuing. Who knows though...

What happens in China market tonight will be entertaining. they cut the rate as requested/demanded by the market. Now if it drops a further 10%, then are we going to see china do QE? Will fed have the balls to raise rates in a month? or will they fold and go for QE4? We live in interesting times... The reason this could get ugly is the Fed can not do a uturn immediately towards QE4. First they are going to come out and say something professional sounding like "Hey, you know about that rate raise, we were just kidding - again!". They may even think that will make a difference to the market, but at that point they may be bringing the equivalent of a knife to a gunfight. In which case, they will be caught off-guard by how little they actually helped the market. Remember, these are my humble prognostications only...odds of them all turning out to be correct is very low.

Ok, that was a really fuckin' ugly way to end Tuesday trading.

Exactly what I did with my mother-in-law's.

This "bounce" is not looking very "healthy" - whatever those two words mean to the short-term guys.

Shit, this market can even get a decent bounce here on Tuesday. Its looking like everything is getting erased into the close...

It's one of the relatively most insulated, with exports being a small percentage of GDP (at about 13%). The rest of the world feels relatively more pain when the US stops buying their goods, than vice-versa. Eric, are the S&P 500's overseas earnings part of "exports". My line of questioning relates to if they aren't, then with emerging and Asian economies slowing, this could impact Europe's economy (which may be more reliant on exports than the US). If this is the case, the rest of the world may be slowing dramatically reducing the S&P 500's overseas earnings (which I hear is half their earnings). Does this make sense? I thought the overseas earnings were what we derive from the exports. Happy to be proven wrong though so I can keep learning. No, I don't think so. If a S&P 500 company has a subsidiary in Europe selling stuff which was manufactured in China, I don't think that is a US export. Same for say Apple Canada selling hardware here, that would not fully be a US export unless the hardware was manufactured, sold and shipped from the US to Canada. I am not saying I am sure, I am just trying to relay that the 50% of earnings of the S&P 500 which are international might take a hit because of a slowing global economy. This doesn't mean the US economy will falter immediately given as you say it is 13% comprised of exports.

It's one of the relatively most insulated, with exports being a small percentage of GDP (at about 13%). The rest of the world feels relatively more pain when the US stops buying their goods, than vice-versa. Eric, are the S&P 500's overseas earnings part of "exports". My line of questioning relates to if they aren't, then with emerging and Asian economies slowing, this could impact Europe's economy (which may be more reliant on exports than the US). If this is the case, the rest of the world may be slowing dramatically reducing the S&P 500's overseas earnings (which I hear is half their earnings). Does this make sense?

I did make money in the last couple of days/weeks, but Valeant, my main position, had a horrible week last week. Overall I am up nicely as my over-exposure to S&P puts more than bailed me out of my over-exposure to Valeant! I sold my in-the-money puts Monday morning - not at the lows, but within 25% of the lows if you take out the worst hour of the day. I still have my at-the-money puts representing 200% of notional - the next weeks/months will determine whether these work out or not. So I have by no means made a killing overall on the portfolio in the last couple weeks although it will be very hard for me not to have a good year (Valeant would really need to underperform the market from here).

I was also lucky to close out a decent chunk of my in-the-money puts yesterday morning and so am reasonably well positioned for a bounce this morning. Still have at-the-money hedges for my portfolio.

Two reasons: He isn't the sharpest knife in the drawer and has the IQ of a toaster.

Certainly relative to the market its a deal. I have seen it at 10x in past.

Where are you optimistic - not on Heinz, not on PCP. Probably not on undistributed earnings from a/0 stocks. Is it your $18B up from $16-17 this year? If so, why assume earnings are going to go up? Would the railway not be having issues at this point with earnings given fracking? Should you just be assuming flat earnings? I haven't run these numbers in about 18 months. Actually I'd be surprised if we are lower than 13x right now...but again I have to run my numbers.

Where are you optimistic - not on Heinz, not on PCP. Probably not on undistributed earnings from a/0 stocks. Is it your $18B up from $16-17 this year? If so, why assume earnings are going to go up? Would the railway not be having issues at this point with earnings given fracking? Should you just be assuming flat earnings? I haven't run these numbers in about 18 months.

Jurgis, Jurgis, Jurgis. Now did I say I was an oracle? No I didn't Jurgis. That was a question. :) Thanks for answering it. :D You are welcome Jurgis. Thanks so much for the question, it was very pleasant.

Depends on a stock. Some stocks are down 20+% this year. BRK is down >15%. Oil stocks are down... censored. Maybe it will, maybe it won't. Are you an oracle? Jurgis, Jurgis, Jurgis. Now did I say I was an oracle? No I didn't Jurgis.

I'm fairly ambivalent. Might go higher or lower. I don't feel particularly gutsy at the moment. Pass. Same for me. That's my point. I'm just trying to ensure we keep balanced here.

Really? After a market that has gone straight up for so many years, we get a relatively small decline like this and everyone is excited about getting a deal! Nobody thinks it will go lower?

I am going to include myself with this comment: "I would not get too cute trying to time things perfectly here." We are all going to be wrong on our timing, so a phased plan makes the most sense to me. This correction has been forming for some time, it became increasingly obvious a couple weeks ago around time of the Yuan devaluation, and then last week, well, I guess it started. I hear Dazel say he has time for Gold, or others say they have time for FFH, etc. maybe. People are stunned now and just selling, we will get a rebound at some point, then things will settle for a few days, people will start to realize where to put their money...its not necessarily the case you have more than a fews days / week or two until people start adjusting to this.