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Speculation Returns To Markets!


Parsad
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I'm having a very, very hard time with what is happening in the markets these days.  AIG at $50/share!  Wow!  You're kidding right? 

 

This weekend I was at a wedding, and a family friend of mine was telling me how his uncle has nearly doubled his stock market investment for him in a few months.  The process...a little of this, a little of that, some of this and some of that.  No discussion of valuation, intrinisic value, growth, balance sheet strength or economics. 

 

We expected the markets to rebound considerably from the March lows in our 1st Quarter letter, but me thinks speculation is beginning to run rampant again and the stupid fast money is flowing swiftly.  Beware the rising tide!  Cheers!

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Sanj,

 

Every time my portfolio hits new highs, I start looking around at what to trim.  Now is one of those times.

 

I wouldn't be too worried about the casino players.  There are speculators in all markets.  We're probably going to start hitting some rougher waters in the fall as major players start coming back into the market after the summer hiatus.  The Dow has risen mightily on weakening volume.  The market is ripe for some short-selling on speculative run-ups.

 

The nice thing about value investing is that the ups and downs of the market are the opportunities presented by Mr Market who is currently in a manic summer phase.  Who knows what the fall brings?

 

-O

I'm having a very, very hard time with what is happening in the markets these days.  AIG at $50/share!  Wow!  You're kidding right? 

 

This weekend I was at a wedding, and a family friend of mine was telling me how his uncle has nearly doubled his stock market investment for him in a few months.  The process...a little of this, a little of that, some of this and some of that.  No discussion of valuation, intrinisic value, growth, balance sheet strength or economics. 

 

We expected the markets to rebound considerably from the March lows in our 1st Quarter letter, but me thinks speculation is beginning to run rampant again and the stupid fast money is flowing swiftly.  Beware the rising tide!  Cheers!

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As long as your barber doesn't suggest you stocks we should be ok.

 

We are just at the beggining of that period of speculation. When moms and dads will receive their mutual fund annual report and see that they have made 10-15 or 20% this year. They will start to realise that it is better than 1 or 2% that bank give them and start to put more money into stock funds.

 

ECCO

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I am with Sanjeev and I am worried now.

 

Whenever I make money too easily in the market, it is often when it stops. I had the same feeling back in June 2007 and unfortunately I did not pull out. This time around, I am not hesitating to trim positions getting close to fair value.

 

Regarding moms and pops getting back in the market and pushing it higher, I believe that the majority have been mostly out since the burst of the Internet bubble in 2000. Many have never regained what they had lost. Their trust for the market was killed back then and their enthusiasm never really returned. They turned instead to housing with the result that we have seen... IMO, it is more the "informed" and rich that drive the market since 2000.

 

Therefore, I think that we can still go a bit higher with hedge funds chasing performance since sitting in cash is no longer acceptable with the S&P up by 14% year to date. However, it seems that we are now getting close to the musical chair game. Many stocks are fully valued or priced for post-recovery earnings. AIG, FNM and FRE are just additional signs of frothy optimism. 

 

Cardboard

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I'm not a follow the crowd, neither a contrarian investor. I do my best to ignore the crowd. Is ABC is a good, solid enough business? Does it has good prospects over the long term? It is run by talented, honest and shareholders oriented managers? What about the price? Is it cheap enough?

 

Wheter people around me are manic or depressive, it doesn't change these fundamental basic questions to me. If the business pass the test, I click on "Buy". If I don't find anything interesting enough, I'll just keep cash waiting patienly for a good offer. I'm happy to say that I still can find some interesting enough opportunities to not having to keep cash to wait.

 

Then, if people offer me a price that is high enough relatively to it's estimated intrinsic value, I'll consider clicking on "Sell".

 

Cheers!

 

 

 

 

 

 

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I'm still finding decent bargains, but the trouble I've had is adjusting my return expectations. March '08 and November '07 presented companies trading at 75% normalized free cash flow, or at 5% of monetizable assets. And you didn't have to go far up the risk curve to dramatically boost your returns.

 

Now, I think you can find decent companies trading substantially below intrinsic value, but it's difficult to forget the excessive reward of having plenty of cash.

 

 

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AIG @ $50 is the equivalent of AIG pre-split @ $2.5.

 

 

AIG at $50/share!  Wow!  You're kidding right?  

 

I know, too cheap!

 

 

http://www.bloomberg.com/apps/news?pid=20601109&sid=a1aa.saUuNRI

 

 

 

WFC is still down for the year.  JNJ is down slightly.

 

I think a core criteria for frothiness is that great companies at least trade in the black.

 

 

PDF attached

 

Cheers!

 

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Guest kawikaho

I've been thinking the same thing lately.  Speculation is running quite rampant.  Look at the GMGMQ.PK stock.  It was trading well over a dollar, and the SEC had to make a statement for people to stop trading it cause it will be worthless.  I don't understand it.  I've come to the conclusion that the stock markets are not efficient, and rigged with casino like behavior instead.  And the idea of value makes sense to all of us, but it really doesn't matter unless it makes sense to the markets.  I used to own a REIT way back in 1999.  It was probably the best stock I've found ever.  It was trading for $5/share, had a 20% dividend, about 100 million in cash with no debt, PE of 5, and trading below book.  I thought I was looking at a fluke.  I didn't buy enough of it because I was thinking why hasn't the market recognized this company??  There must be something wrong with it.  I just bought a little bit of it, and ultimately, after staying at $5-6/share for a year, the company issued a press release saying it was fed up with the markets not recognizing its value and decided to buy itself out at $8/share and go private.  With the dividend, I made 100%.  I think ultimately the markets realize value, but that REIT, FNM, FRE, AIG, all those dot com stocks, GMGMQ, I can go on and on, make me question that. 

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Whenever I make money too easily in the market, it is often when it stops. I had the same feeling back in June 2007 and unfortunately I did not pull out. This time around, I am not hesitating to trim positions getting close to fair value.

 

Cardboard, Quite Frankly, there was absolutely nothing easy about the money I have made since March.

 

It was unpleasant and stomach churning to dive into megacaps when people were predicting GE was on the verge of bankruptsy.  I bought well over a hundred SPY options that lost money into early March.    I sold the higher strike ones at a loss and bought lower strike positions.

 

There was definitely nothing easy about it. 

 

That being said I have been trimming many of my option positions as the market goes higher.  At some point in the fall there will be a downside adjustment. 

 

I am looking more in traditional value areas now with common stock. 

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Keep in mind that most all stocks in the US are still 50% off their 2007 high. Therefore, all those who think the current market is speculative, I ask compared to what? Stocks are still quite reasonably priced. I don't think we have anything speculative about the current prices. The US "Mega-Bear" is in its 10th or 11th year now on an inflation adjusted basis. Japan and the Great Depression have been at it for 20 years after the top. To recover a 50% loss at 10% per year from *current prices* would take about 7-8 years, that would put the US "mega-bear" at 17-18 years in length. And frankly I suspect it will happen much faster, 5 years tops. So I would argue the current prices are not as speculative as people think, in fact they are still an out-right bargains given the likely outcome. Think long-term not to make your investment statement beautiful for the end of the year. Are today's prices likely to look cheap over the next decade? If so, I would be buying on the dips as much as possible. Buffet bought BYD at $8 or so per share and is now contemplating buying more at $50/share less than a year later - if the company allows Mid-American that is. That is how investing is done, anchoring is a big mistake. Who is to say the stock is expensive at $50 even if you bought it at $8 if in 10 or 20 years it is worth $1000?

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On Oct 16, 2008, Warren Buffett wrote the article "Buy America, I am." The S & P 500 was at 900 level the day before. Now it is at about 1000 level. If you agree with Buffett, the market is still at the buying range. I am not selling.

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Keep in mind that most all stocks in the US are still 50% off their 2007 high. Therefore, all those who think the current market is speculative, I ask compared to what?

 

The S&P500 is off only 33% since its peak.  You may be assuming that the previous high was fairly priced.  In hindsight, we know it certainly wasn't.  

 

Intrinsic value is based on all the cash you can pull out of a business over its lifetime, discounted back to the present.  Are cash flows going forward for the S&P500 going to be at the same level they were in October of 2007, or that the rate of growth in cash flows will be the same?  I don't think so...at least not for the next five years or so.

 

Think long-term not to make your investment statement beautiful for the end of the year. Are today's prices likely to look cheap over the next decade? If so, I would be buying on the dips as much as possible. Buffet bought BYD at $8 or so per share and is now contemplating buying more at $50/share less than a year later - if the company allows Mid-American that is. That is how investing is done, anchoring is a big mistake. Who is to say the stock is expensive at $50 even if you bought it at $8 if in 10 or 20 years it is worth $1000?

 

You are correct.  It all depends on what you expectations are.  If you are happy with 7-9% returns going forward, then you probably are fine buying stocks.  If you expect higher returns, it may be tougher.  Buying a stock at $50 that will be worth $1000 twenty years from now, gives a return of 16% annualized.  Buying the same stock at $8, gives a return of 27% annualized.  That is an enormous difference.  Thus, buying today all depends on what return you are aiming for.  My original comments were simply meant to say that speculative money is now pouring in and those that think investing is easy are now fiercely in the game.  Cheers!

 

 

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"Buying a stock at $50 that will be worth $1000 twenty years from now, gives a return of 16% annualized.  Buying the same stock at $8, gives a return of 27% annualized.  That is an enormous difference"

 

True, but not buying it at all is 0%, also a big difference, even bigger than the difference between 16% and 27% :)

 

Anyway, I believe the market is still a good deal today for good returns. Early this year was an anomaly, most times the market won't be in a -50% to -60% scenario. I'm not entirely sure the market was that overvalued in 2007 but it may have been ahead of itself a few years. Already 2 years have passed, another 2-3 and we could be back there again.

 

 

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 Are cash flows going forward for the S&P500 going to be at the same level they were in October of 2007, or that the rate of growth in cash flows will be the same?  I don't think so...at least not for the next five years or so.

 

Call me the supreme optimist but that sounds so ultra conservative.  Are you assuming little in the way of inflation going forward Sanjeev?  Just with everything going on, I figure there is a strong chance of returning to at least the historical inflation rate of 3% over the next 5 years.  In fact there is a very good argument that the inflation rate could exceed this significantly.  But suppose one goes with 3% inflation along with say 1.5% of sluggish growth.  Now that is below the historical norm of about 6% nominal GDP growth (3% real + 3% inflation) --- but even based on this kind of sluggish achievement that equates to almost a 25% improvement in 5 years time.  Even off of today's levels this type of improvement would seem to put at least revenues well beyond what they were in 2007.  Under a stagflation scenario margins might lag somewhat --- but the inflation part of the formula would increase things much further than than the 25% sluggish calc.  Now if you are figuring 2 or 3% nominal growth (1-1.5% real + 1-1.5 inflation) then under that scenario for sure it could take 5 years to reach where the economy was in 2007.  I am just not sure that inflationary pressures can be held off for that long though -- but who knows.    

 

 

If you are happy with 7-9% returns going forward, then you probably are fine buying stocks.  

I doubt that very many here would be happy with 7-9% returns; however, 7-9% would be higher than the historical achievment which has long term pretty much followed along the lines of nominal GDP (historically about 6%).  A rate of 7-9% going forward would either assume higher nominal GDP growth OR that stocks are presently undervalued (albeit much less than they were in March).  

 

But I am assuming here that you are referring to the averages (perhaps the S&P 500).  As intelligent investors don't we all seek out the company's that will perform above average .... and preferably be more undervalued than the average.  If one is to buy (especially as you put it 'on the dips') there could be some excellent opportuniities.  Personally, I am finding the best bargains at present in the small cap, little known situations.  But I am not selling much of what I bought in the March panic either as I still view them to significantly exceed what the average return might be over the long haul.  The only instances where I might sell would be to get in to something where there is substantial improvement in risk/reward.

 

UCP / DD

 

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Guest Broxburnboy

Insiders are overwhelmingly selling:

 

http://news.prnewswire.com/DisplayReleaseContent.aspx?ACCT=104&STORY=/www/story/08-28-2009/0005084471&EDATE=

 

 

Speculative frenzy in financials dominates trading volume:

 

http://seekingalpha.com/article/159140-junkdex-tracking-the-speculative-frenzy-in-junk-financials

 

 

Characteristics of a market top?

 

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I think you need to look at specific segments to see the overvaluation.  A good portion of the stock offerings were debt for equity swaps of real estate and finance firms.  This is not the like the speculative housing or dot-com bubbles we have seen.  Marty Whitman made a great observation in his latest letters - the past two years has been Catastrophe Investing where all sectors have been hit and this is not the norm.  The norm is rolling recessions/depression in a few industries at a time.  I think we are going back to the rolling recession and are not in the general recession era.  Thus there will be opportunities on a sector by sector basis.  Has anyone looked at some of the radio stocks, they appear cheap and analysts have been dropping thier coverages like flies.

 

 

Packer

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Guest kawikaho

I dunno, I think Radio is dead.  There have been so much casualties in radio in the past few years.  Some icons, like KSJO ins San Jose, just went to the crapper last year.  That station was around forever, and it was sad to see it go.

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I think with RoIC's ranging from 19% to 51% averaging in the 30%s with the bad ad environment we have today, radio may be down with the decline in advertising but it is not out.  I just ask myself where else are you going to go if you want to build a brand in the US (radio, TV and internet, maybe outdoor or video games).  The US is still the biggest and most valuable market in the world and these media firms are the gateways.  One observation is the value of the overseas TV and radio firms have not declined like the US firms.  The question in my mind is will the TV and radio firms co-opt technology advances like the telcos or will they be destroyed by them.  I think they will co-opt. 

 

Packer

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Uccmal2,

 

"Cardboard, Quite Frankly, there was absolutely nothing easy about the money I have made since March.

 

It was unpleasant and stomach churning to dive into megacaps when people were predicting GE was on the verge of bankruptsy.  I bought well over a hundred SPY options that lost money into early March.    I sold the higher strike ones at a loss and bought lower strike positions.

 

There was definitely nothing easy about it."

 

No, I fully agree with you. It took courage to buy in February, March and also last Fall and it took quite a while and a lot of questioning in between until one could finally harvest the fruit of his labour.

 

My "problem" is that I recently bought two companies that went up around 50% in a matter of days. That is what I call too easy. For me it is a sign to look for the exits.

 

Cardboard

 

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  At 90% of GDP, roughly the historic longterm average, you'd have to be very pessimistic about future growth to say this market is "speculative". Nothing I own today has even approached 50% of what it would sell for today in a private transaction...with a fat margin of safety you hardly have to worry about what the entire market is worth. 

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