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Being prepared for another descent


Guest Broxburnboy
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Guest Broxburnboy

Eric Sprott is calling for a downward plunge in the S&P sometime this year:

 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=akUcvHutU8i0

 

What are the chances that he is right? Based on market fundamentals and the dismal state of the real US economy and housing markets, should investors be developing a Plan B to implement should we be faced with such an eventuality? Will FFH be a safe haven in such a scenario, if not what?

 

Where can we hide? Cash? commodities? gold?

 

 

 

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I am consdiering hedging 25% of my portfolio (like Fairfax) with SPY puts as they are cheap (about 5% per year or 1.25% per year for 25% of a portfolio).  I would like to hear other's ideas and whether an individual can get a total returnn swap like Fairfax.

 

Packer

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Sprott's July letter points out that we're in a depression right now (according to Sprott) and that S&P500 at 189 level is possible in a depression.

 

http://www.sprott.com/Docs/MarketsataGlance/July_2009.pdf

 

These are his three fearful scenarios.

 

1. Earnings stay constant; P/E ratios hit cycle lows: We assume a scenario where investors

are nervous, people need to sell stocks to pay for lost wages, or for retirement, but the

companies continue to perform as of June 2009. Assuming a P/E of 6, which is close to

the all time low, and using an earnings value of $63.04 for the S&P 500 Index, we derive

an S&P 500 Index value of 378.16

 

2. Earnings get halved; P/E stays constant: Earnings have been half of their current value

three times over the last 30 years – so it is entirely within the realm of possibility that

they could be halved once again. In the late 1970’s, early 1980’s and early 1990’s the

S&P 500 Index generated half the earnings per share that it did this year in 2009 dollars.

Using today’s P/E multiple of 16.08 results in an S&P 500 value of 506.

 

3. Earnings get halved; P/E ratios hit cycle lows: double trouble. If we combine these cases

where earnings are cut in half from today and the P/E ratio drops to a cycle low, it

implies an S&P 500 Index value of 189 (depression territory).

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I am buying on Monday and will be fully invested. I feel as though I am prepared for the downturn and own mostly owner manager companies.

 

Most of these companies are run by capital allocators with excess cash who and will take advantage of the downturn. I will also be able to pump income into the market if it goes down for a period of months. I am hoping to raise my cash position to 5-10% of my portfolio via income by the end of March.

 

I should do much better then during the last downturn (Heavy short term leverage is extremely painful in a declining market) so I am not too worried. I will stay debt free and will continue to pump excess income into the market or cash depending on the bargains. The owner managers should act as a buffer during a downturn. It will probably still be painful looking at my brokerage account.

 

I would love to wait but, I am finding alot of cheap great deals right now and by and large like my holdings. 

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I don't know where the market will go and quite frankly nobody knows. I have kept about 25% of my portfolio in cash since september and I'm quite happy I did, the outlook is getting somewhat clearer now so even tough the reward have not gone up the risks have gone a bit down. I'll probably be down to 10% cash soon.

 

Buy things at an attractive price and you will probably be better off then others. Not a lot of opportunities available tough, I just spent my Christmas vacations looking for stocks to put in the pipeline and all I came up with was BRK and another canadian small cap. NOTHING compared like march! God, please bring me another march  :).

 

I don't believe in hedging with derivatives unless you have vast amount of stocks and the trading fees of selling/buying a lot of them would be higher then buying puts. For me, cash is the perfect hedge, it's free, perfectly liquid, as simple as it gets and it can provide meager returns if placed in TIPS.

 

BeerBaron

 

 

 

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With due respect to Sprott, one needs to understand where he is coming from.  He runs hedge funds so while he is talking his book, he is also preparing for the opposite of his book. 

 

I am also of the opinion that no one can forecast markets.  FFH hedged with CDS' for 4 years before the event was realized, and their hedging was very specific at first to mortgage packagers.  Prem had been forecasting a full market meltdown for 10 years. 

 

While Sprott is predicting declines, Marc Faber has been predicting better times, as has Barton Biggs,and Warren Buffett (by his actions at least).  All of them have decades in the business, so who is right? 

 

Is anyone else getting forecasting fatigue right now?  I have just stopped reading any articles that are not company or industry specific. 

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I am buying on Monday and will be fully invested. I feel as though I am prepared for the downturn and own mostly owner manager companies.

 

Most of these companies are run by capital allocators with excess cash who and will take advantage of the downturn. I will also be able to pump income into the market if it goes down for a period of months. I am hoping to raise my cash position to 5-10% of my portfolio via income by the end of March.

 

I should do much better then during the last downturn (Heavy short term leverage is extremely painful in a declining market) so I am not too worried. I will stay debt free and will continue to pump excess income into the market or cash depending on the bargains. The owner managers should act as a buffer during a downturn. It will probably still be painful looking at my brokerage account.

 

I would love to wait but, I am finding alot of cheap great deals right now and by and large like my holdings. 

 

 

Those are the types of companies that tend to do well no matter what.  Would you be so kind as to share them with us?  (FFH & BRK excepted) Also a brief synopsis would be most helpful if possible. :)

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The Companies are pretty well known and discussed on this board.

 

Aside from FFH and BRK.

 

FUR - Has a bit of cash and is a REIT. He is waiting for the commercial space to continue declining. He also owns a nice chunk of stock and has Berkowitz as a backer.

 

L - Run by the Tisch brothers and they have cash to spend. You receive a double discount because some of the holdings are also undervalued (CNA trades at a steep discount to book but, has historically been a crappy insurer. They are rightsizing the investments and trying to turn it around).

 

BAM - I dont hold because I think BAM is unnecessarily complex and doesnt have much liquity but, many also see it in the same light as the others.

 

My core holdings are FUR, L, and FFH. Looking at BRK and SNS.

 

MCF - Tied to natural gas but run by an owner manager with a cash pile.

 

SNS - Another good options.

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